By Maria Martinez
BERLIN, July 30 (Reuters) - Germany's gross domestic product grew more than expected in the second quarter despite rising prices caused by the Iran conflict, but risks loom on the horizon as hostilities flare up again.
German GDP expanded by 0.2% compared with the previous three-month period, preliminary data from the statistics office showed on Thursday. Analysts polled by Reuters had forecast a rise of 0.1%.
Separate data showed that GDP grew by 0.2% in France and Italy and by 0.7%
in Spain, suggesting activity in the euro zone held up well in the second quarter.
However, analysts cautioned that the geopolitical situation remains very uncertain, especially after the collapse of a temporary ceasefire agreement between Iran and the U.S. and the resumption of fighting over the Strait of Hormuz, a crucial waterway that Tehran says it now controls.
As a result, higher energy prices are likely to continue weighing on the global economy in the second half of the year.
Inflation rose in four key German states in July, according to preliminary data published on Thursday, suggesting the national inflation rate, which will be released later in the day, could also increase this month.
BRIGHTER GERMAN GDP DATA
The German economy grew by a revised 0.4% in the first quarter, up from the 0.3% previously announced. It has been expanding modestly for the last three quarters, following two quarters of stagnation in 2025.
In response to the increase in the second quarter and the upward revision of the first quarter, Commerzbank has raised its growth forecast for this year from 0.6% to 1.0%.
"The recovery of the German economy is more pronounced than previously thought," Commerzbank's chief economist Joerg Kraemer said.
At the start of July, Chancellor Friedrich Merz outlined a package of pension, tax and labour reforms to boost growth, jobs and competitiveness after years of meagre economic growth.
Economists say the reforms could lift Germany's sluggish growth rate, and German business morale improved more than expected in July, reflecting hopes for the reform package.
The improvement in the Ifo economic institute's business climate index points to the recovery continuing in the second half of the year, Ifo economic chief Timo Wollmershaeuser said.
"Some industrial sectors benefited from the fact that Asian competitors were hit harder by the closure of the Strait of Hormuz," said Carsten Brzeski, global head of macro at ING.
Exports were up compared with the previous quarter, driving the increase, the statistics office said.
DOWNSIDE RISKS
However, against the backdrop of geopolitical uncertainties, front-loading effects may also have played a role here, said Marc Schattenberg, economist at Deutsche Bank Research.
Household consumption showed a subdued trend and investment declined compared with the previous quarter.
Brzeski said it was clear that the short-term outlook for the German economy remains highly dependent on energy prices and the Middle East conflict as it affects both industry and households.
Analysts also cited the risk posed to Germany's economic output by low water levels in the Rhine caused by an acute lack of rainfall during an exceptionally hot summer in western Europe.
The effects of these low water levels alone could dampen GDP in the third quarter by 0.1% to 0.2%, said economist Stefan Kooths of the Kiel Institute for the World Economy (IfW).
(Reporting by Maria Martinez, additional reporting by Rene Wagner, Editing by Miranda Murray and Gareth Jones)
