By Maria Martinez
BERLIN, Aug 25 (Reuters) - Germany's economy grew faster than initially indicated in the second quarter and business morale hit its highest level in a year in August, the latest signs of a long-awaited turnaround following years of anaemic growth.
Gross domestic product grew by 0.3% in the second quarter from the previous quarter, slightly above last month's preliminary reading of 0.2%, the statistics office said.
The Ifo business climate index rose to 88.8 in August from 86.7 in July.
Analysts had forecast an increase to 87.2 in a Reuters poll.
"Despite the renewed rise in energy prices, the German economy is recovering," said Ifo President Clemens Fuest.
Tuesday's positive data follows a stronger-than-expected rise in investor morale last week, as well as improved quarterly company earnings, stronger exports and industrial production that beat expectations in June.
A NASCENT RECOVERY
"The German economy is maintaining the growth momentum seen at the start of the year," said Ruth Brand, president of the statistics office.
Germany's GDP expanded by 0.4% in the first quarter, and has grown modestly for three consecutive quarters after two quarters of stagnation in 2025.
Further evidence of an economic turnaround would be positive for Chancellor Friedrich Merz, who has been sliding in opinion polls and who faces state elections next month that could propel the far-right AfD to power at regional level.
"It is encouraging that the economy still seems to be growing despite the headwinds of higher energy prices and dry weather-related disruptions to transport on the Rhine," said Harry Chambers, assistant economist at Capital Economics.
Higher oil and natural gas prices as a result of the Iran war had hampered a long-awaited recovery in Europe's largest economy. The economy ministry in April slashed its 2026 growth forecast to 0.5% from a previous estimate of 1%.
As in the first quarter, growth was primarily driven by exports, which rose 2.0% quarter-on-quarter.
Ralph Solveen, senior economist at Commerzbank, said the data showed that the economic recovery observed since the end of last year is primarily attributable to stronger foreign demand, with government spending playing a minor role.
Household consumption was subdued, expanding by a modest 0.1%, while investment declined by 0.2% compared with the previous quarter.
A MIXED OUTLOOK
Economic expectations in the Ifo survey rose to 89.1 in August from 86.8 in July, while companies were more satisfied with their current business performance.
German sentiment has become "immune or numb" to the long list of potential downside risks, said Carsten Brzeski, global head of macro at ING.
Recent economic data have been stronger than expected and increased government spending from the €500 billion ($583 billion) infrastructure fund should support a rebound in growth.
Surveys have improved markedly in the early third quarter, especially in manufacturing, but downside risks still loom from very low water levels on the Rhine, which could weigh on output with a lag, and the uncertainty around the war in Iran.
"Despite the obvious headwinds, the German economy is on track for its best growth performance since 2022," said Brzeski.
(Reporting by Ludwig Burger and Maria Martinez; editing by Friederike Heine, Louise Heavens and Conor Humphries)
