Provide more evidence for the European Central Bank to raise interest rates? Germany's economy adds another signal of recovery: unexpected growth in exports in May, following the recovery of output and orders.

Data released by the Federal Statistical Office of Germany on Thursday shows that German exports increased by 0.9% in May to reach 137.9 billion euros, far exceeding market expectations of a 0.4% decrease, marking the fourth consecutive month of growth. Imports, on the other hand, decreased by 2.5% to 118.8 billion euros. The trade surplus for the month expanded to 19.1 billion euros, higher than April's 14.7 billion euros. The strong rebound in exports to the United States was the most prominent highlight of this round of data. In May, German exports to the United States surged by 23.1% to a total of 14.1 billion euros, also increasing by 15.4% year-on-year. Exports to China also saw a growth of 7.1% to 6.2 billion euros. This data is consistent with the earlier statement by Volker Treier, head of foreign trade at the Association of German Chambers of Commerce and Industry (DIHK) - despite ongoing geopolitical tensions and the Middle East conflict, trade conditions remain surprisingly good, with the recovery of exports to the US being particularly noteworthy. The entry into force of the Tennenberg Agreement: a catalyst for exports to the US The strong rebound in exports to the US is closely related to the temporary easing of EU-US trade relations. In July 2025, the President of the European Commission, Von der Leyen, reached a framework agreement with US President Trump at the Tennenberg Golf Course in Scotland. After nearly a year of back-and-forth negotiations, the European Parliament officially approved the core tariff legislation of the agreement on June 16. According to the agreement, the EU will reduce tariffs on US industrial goods (including machinery and automotive parts) and lobsters to zero; in exchange, the US will maintain tariffs at around 15% for most European goods. The EU's tariff measures came into effect on July 7. Treier from DIHK explicitly pointed out that the negotiations between the EU and the US on the Tennenberg Agreement, as well as the temporary agreements on steel and aluminum products, have had a positive impact on exports. DIHK had previously lowered its export growth forecast for 2026 from 4.3% to 2.5%, but the unexpectedly strong performance in May data provides some room for adjustment to this slightly pessimistic outlook. Additional positive economic data: industrial output and factory orders surpass expectations Exports data is not the only bright spot in the German economy. Data released earlier this week shows that the momentum of Germany's economic recovery is spreading across multiple dimensions. Industrial output in May increased by 0.9% month-on-month, well above the market's expectation of 0.1%, marking the second consecutive month of growth. The main driver of growth came from the automotive sector, which saw a strong increase of 3.6%, while the construction sector also expanded. ING analysts pointed out that some German companies even benefited from the Middle East conflict - as their Asian competitors were more severely affected by the closure of the Strait of Hormuz, German companies gained some orders transfer dividends. Regarding factory orders, they increased by 1.9% month-on-month in May, significantly higher than the market's expectation of 1.1%, reversing the 3.2% decline in April. The growth in orders was mainly driven by the transportation equipment sector - new orders for other transportation equipment manufacturing sectors including airplanes, ships, trains, and military vehicles surged by 85%, driven by several large supply contracts. Looking at the three-month rolling period, new orders from March to May showed a slight decrease of 0.2% compared to the previous three months, indicating a stabilization of industrial orders. The German Ministry of Economy stated that the above data indicates a recovery in manufacturing orders since the second half of 2025. Marco Wagner, an economist at Deutsche Bank, pointed out that the unexpectedly strong rebound in factory orders in May indicates that companies are beginning to adapt to the new geopolitical reality. Economic growth prospects: dawn is breaking, but challenges remain Michael Herzum, an economist at Union Investment, stated: "The outlook for gradual recovery in the coming months has improved. Geopolitical uncertainties surrounding the Iran conflict have eased, energy prices are stabilizing, the global economy remains resilient, and increased government spending on infrastructure and defense is expected to increasingly filter into the real economy." Germany's GDP in the first quarter of 2026 grew by 0.3%. The coalition government led by Prime Minister Friedrich Merz announced a series of reform plans for the pension system, income tax, and sick leave rules last week, in an attempt to break the long-standing economic stagnation in Germany. In terms of export structure, the US is once again becoming the core engine of German export growth. Data from the first quarter had shown that China was still Germany's largest trading partner, but the gap has significantly narrowed. The 23% month-on-month growth in exports to the US in May, as well as the institutional dividends from the Tennenberg Agreement, are reshaping the geographic map of German exports. However, the uncertainties of energy prices, geopolitics, and global trade prospects will continue to test the strength of Germany's economic recovery. As DIHK stated, trade conditions are "surprisingly good" - but the very fact that they are "surprisingly good" indicates that the foundation of the recovery still needs further consolidation. As the largest economy in the Eurozone, Germany's recovery directly determines the growth prospects of the entire Eurozone. The European Central Bank's June forecast shows a GDP growth rate of only 0.8% for 2026, rising to 1.2% in 2027. The forecast from the European Commission is even more pessimistic - predicting only 0.5% economic growth for Germany in 2026. Analysis from ING points out that the recovery of German factory orders is mainly driven by domestic demand, although external demand is also showing signs of improvement recently. Given the decline in exports to Europe in May, the recovery of internal demand in Europe remains very fragile. The "single-engine" driving mode of exports to the US makes the overall European economy increasingly dependent on transatlantic and China Welding Consumables, Inc. trade relations and geopolitical situations in the Middle East. German export data still faces the "stagflation dilemma" of the European Central Bank While the May export data from Germany is a bright spot, it is not sufficient to change the weak underlying tone of the overall European economy - shrinking internal trade in Europe, sluggish domestic demand, and high geopolitical risks. Nor is it enough to change the inflation pressures faced by the European Central Bank - with a forecast of 3.0% inflation in 2026, quarterly peaks of 3.4%, and stubborn core inflation. The improvement in export data, paradoxically, complicates the decision-making for the European Central Bank: it provides evidence for the narrative of "economic resilience," giving hawks a reason to advocate for continued rate hikes; yet the fragility of the export structure and strong opposition from the German economic sector also give doves a reason to argue for maintaining the status quo. While the pressure for rate hikes has marginally eased, it has by no means disappeared. On June 11, the European Central Bank announced a simultaneous 25-basis-point increase in its three key rates, with the deposit facility rate rising to 2.25%, the first rate hike since September 2023. ECB President Lagarde explicitly stated that the ongoing Middle East conflict is continuing to push inflation higher, and the duration of the energy shock is "longer than expected by geopolitical experts." At the same time, the pressure for rate hikes has marginally eased. First, there is a cooling of inflation in Germany. The year-on-year CPI increase in Germany fell from 2.6% in May to 2.3% in June, lower than the expected 2.5%. As the largest economy in the Eurozone, Germany's inflation trend is of significant importance for indicating the policy direction of the entire Eurozone. Secondly, oil prices have fallen; during the US-Iran ceasefire agreement, Brent crude oil fell to around $72, much lower than the over $100 during the peak of the conflict. This has alleviated some of the input inflation pressures. However, the pressure has not disappeared: after Trump announced the end of the US-Iran ceasefire agreement and launched a new round of strikes against Iran, oil prices have risen again. Data released by the European Central Bank on July 2 shows that the inflation rate in the Eurozone fell from 3.2% in May to 2.8% in June, lower than the expected 3.0%, but core inflation and service sector inflation remain stubborn. The European Central Bank has explicitly stated that it will adjust rates at each meeting based on data and will not commit to a specific rate path in advance. Future policy path: the September meeting is the true "watershed" Overall, it is highly likely that the rates will remain unchanged at the next meeting on July 23. However, the September meeting is the true policy watershed - by then, the decision-makers will have access to complete second-quarter GDP data, June-July inflation data, and new wage data. Evaluation by Berenberg Bank suggests that a one-time 25-basis-point rate hike in June may be tolerable for the economy, but if rate hikes continue in July or September and exceed expectations, the Eurozone may fall into a "man-made recession." Lagarde explicitly stated at the Sint-Agatha Forum that the risks of inflation rising and economic growth declining are "more balanced than a few weeks ago." This statement implies that the European Central Bank is transitioning from a "single-minded anti-inflation" mode to a "balanced inflation and growth" mode. German export data plays a delicate role in this balance: on one hand, the rebound in exports provides a narrative of "the economy is not as bad as imagined," giving the central bank a reason to continue fighting inflation; on the other hand, the fragility of the export structure (overreliance on the US, shrinking internal trade in Europe) and high geopolitical uncertainty constantly remind the central bank not to tighten excessively.