The German economy is proving robust and resilient. Despite a difficult global economic environment and recessionary tendencies in the eurozone, it continues to grow, albeit at a considerably slower pace.

Output in industry and construction recovered appreciably in July. Industrial orders also picked up slightly in July and are generally trending sideways. According to the August surveys, the darkened mood in industry brightened somewhat for the first time in months. Latest figures show German exports continue their powerful expansion.

However, leading indicators suggest more moderate growth. The weaker economy is becoming increasingly reflected in decreasing dynamism on the labour market. Nevertheless, employment continues to grow and boosts domestic demand.

Germany's economy is growing, albeit at noticeably slower pace. In a difficult global economic environment, it has so far continued to prove comparatively robust and resilient. Following an unexpectedly strong first quarter, GDP grew further in the second quarter by 0.3% (adjusted for price, calendar-day and seasonal variations). According to the current cyclical indicators, the development in the second half of the year is likely to be very stable. For example, the indicators of sentiment recovered slightly in August after worsening significantly in some of the preceding months. Nevertheless, there is no cause to relax: the downside risks to the economy are continuing to predominate and remain considerable.

This development is not least due to the crisis of confidence triggered by the sovereign debt crisis in the eurozone. Such a crisis can only be countered by measures which stabilise expectations: a pro-growth budget consolidation policy and a credible reform policy. The purchasing of bonds on the secondary market as announced by the ECB can only help to secure the supply of money to the economy for a certain period of severe crisis. However, it cannot substitute for structural reforms and adjustments in the real economy. Lasting interest-rate subsidies for individual countries would provide false incentives and are unacceptable. It is appropriate and welcome that the ECB will tie the purchase of bonds to conditions. This means that if countries are to receive any assistance, they must actually tackle their structural problems.

Even if the situation on the financial markets recently improved somewhat, the German economy is not unaffected by the recessionary developments, some of which are significant and most of which are to be seen in southern European countries. For example, exports of goods to the eurozone, which remains the most important market for German exports, dropped substantially below the pre-year level in the first half of 2012. The fact that German imports from the eurozone are picking up again is however positive. Not least, Italy and Portugal have contributed to this. This could be a first indication that structural changes have been initiated in these countries which improve their competitiveness and thus help to reduce the economic imbalances in the eurozone.

Economic dynamism weakened appreciably in the second quarter, not only in the eurozone, but also in other major industrial countries like the U.S. and Japan, and in large emerging economies like China. Against this background, the IMF reduced its growth outlook for the global economy as a whole in its July forecast. For 2012, it expects GDP to increase by 3.5% in real terms and growth in world trade to slow considerably to +3.8%. At the same time, the various economic regions are sending very different signals. In the U.S., there are currently slight indications of a pick-up in the economy. However, the leading indicators there are still mixed. The development of the world economy remains fragile, and so on balance the environment for German exporters is still difficult. Nevertheless, overall German exports are still tending upwards. In July, they rose by 0.5%. The reason for the continuing positive development is the high level of competitiveness of the German economy and the continuing demand for its range of products on the fast-growing markets. Nominal imports of goods rose by 0.9% in July.

Economic activity in the goods-producing sector improved significantly again in the recent months covered by this report, following weak development at the beginning of the year. Both industrial and construction output expanded unexpectedly strongly in July, at 1.7% and 1.9% respectively. Here, industrial output was boosted by growing foreign business with non-eurozone countries and by an improvement in domestic sales of capital goods - according to the latest figures, this improvement has been significant. Construction work is being helped by the continuing very low interest rate. This increases the likelihood that these areas of the economy - so important for the overall development - will record a stable development in the second half of the year. This is underpinned by the development in industrial orders, which registered a slight recovery in July (+0.5%) and are trending sideways. The mood in industry remains problematic. However, after worsening for several months, both the ifo business climate index and the Markit/BME purchasing managers index suggest that it is brightening again. Following the downward development in industrial output in the first half of this year, the current cyclical indicators now suggest that the low-point is being reached.

The effects of the weaker cyclical dynamism during the year so far are increasingly being reflected on the labour market. Since the spring, there has been a gradual rise in unemployment. In August, as in July, it rose by a seasonally adjusted 9,000 people. However, the increase in employment is continuing. The level of gainful activity is growing further, based on the rise in employment subject to social security contributions. Nevertheless, the development of the economy meant that the improvement in employment in July was markedly smaller than in the preceding months, at a seasonally adjusted increase of 16,000 people.

Even though the declining dynamism on the labour market is obvious to see, the labour market is still boosting the economy. Alongside the rise in wages, the ongoing growth in employment continues to be the key factor driving the increase in disposable income. Despite greater scepticism about the economy on the part of consumers, this is ensuring that the consumer climate remains stable and provides a sound basis for a continuing positive development of consumer spending. This has given a clear boost to domestic demand over the course of the year so far, and it is likely to continue into the second half of the year. Measures like the cut in pension contributions adopted by the Federal Government, and the tax reform to combat fiscal drag adopted by the Federal Government and the Bundestag, are not least contributions towards a stable consumer climate and thus domestic demand.