Germany's manufacturing sector expanded in February for the first time since 2022, posting a purchasing managers' index (PMI) reading above 50 and ending the longest industrial contraction in the eurozone's largest economy since reunification.
The turnaround comes courtesy of a massive government spending program approved last month, which is pumping capital into infrastructure, defense, and green energy projects. It's a remarkable pivot for a country that spent two decades preaching fiscal discipline to its neighbors.
The contrast with the United States couldn't be sharper. While American GDP growth just missed estimates badly at 1.4% and inflation remains stuck at 3%, Germany is demonstrating that targeted fiscal stimulus can restart stalled industrial machinery when monetary policy has run out of room.
The numbers are preliminary, but the direction is clear. Germany's pivot away from its traditional export-led model toward domestic demand creation represents a fundamental shift in Europe's economic architecture. For decades, Berlin ran budget surpluses while Southern Europe struggled with austerity. Now Germany is spending, and the results are showing up in factory orders.
For investors, this matters beyond Europe. Capital flows follow growth, and if Germany sustains this expansion while the U.S. slows, expect to see portfolio rebalancing toward European equities. The "U.S. exceptionalism" trade that dominated the past decade looks increasingly vulnerable when Germany—Germany!—is outgrowing America.
The defense spending component is particularly significant. Germany's commitment to reach 2% of GDP on defense, plus additional funds for Ukraine support, creates sustained demand for industrial production. Unlike consumer spending, which fluctuates with sentiment, government contracts provide visibility that manufacturers can plan around.
The green energy investment is the other pillar. Germany is rebuilding its energy infrastructure after severing ties with Russian natural gas, and that requires massive capital expenditure on wind, solar, and grid modernization. Again, this is multi-year demand that creates order backlogs.
Will it last? The sustainability question comes down to whether this spending creates productive capacity or just inflates asset prices. Germany's track record on infrastructure execution is mixed—this is a country that took nine years to open a single airport in Berlin. But the manufacturing PMI doesn't care about long-term productivity. It measures current activity, and current activity is expanding.
The political economy angle is fascinating. Germany abandoned fiscal orthodoxy because the political cost of industrial decline became unbearable. When your auto sector is struggling with Chinese EV competition and your chemical industry is getting hammered by high energy costs, the old rules stop working. Berlin chose growth over balanced budgets, and so far, it's working.
For American multinationals with European exposure, this is the opportunity. If Germany is genuinely turning the corner, the spillover effects across the eurozone will create demand. The currency implications are also worth watching—a stronger euro relative to the dollar could shift competitive dynamics in global trade.
The skeptical read is that this is a sugar high from fiscal stimulus that will fade once the spending programs mature. The optimistic read is that Germany finally learned the lesson that Japan taught in the 1990s: you can't save your way out of a demand crisis. The data over the next six months will tell us which interpretation is correct.
