The recovery of the German economy from the stagnation and recession phase is still proceeding tentatively and unevenly. The announced measures to strengthen public and private investment will have a considerable impact on the economy. But these effects will only start to materialize in 2026. Currently, the weak global economy, higher US tariffs, and meagre domestic demand continue to have a dampening effect. Exports are unlikely to be a significant driver for economic growth. Domestic demand will have to step in. At least the agreement between the European Union and the United States now provides companies with more planning certainty again, even though the permanence of the agreement is not certain. The ongoing geopolitical turbulences contribute to businesses and private households only slowly abandoning their pessimism. However, past ECB interest rate cuts support domestic demand.

In the second quarter of 2025, gross domestic product slightly contracted by 0.3%. Government consumption considerably increased, while private consumption only expanded moderately. Interestingly, fixed investment contracted by 1.4%. Presumably, high uncertainty surrounding the trade talks with the U.S. contributed to this decline. In addition, some firms might have postponed their investment projects until tax incentives came into effect in July. There was no impetus from foreign trade. Exports stagnated, while imports expanded.

German industry continues to struggle. Production declined in the summer months. Order intake is also developing sluggishly, and the ifo Business Climate Index is not yet showing any increasing momentum. The tariff increases now actually taking effect and the weakening global economy are weighing on German industry, which is heavily integrated into global trade. However, the tentative upturn beginning in Europe and the prospect of the federal government’s investment packages starting to take effect should slowly give German industry somewhat more momentum. The federal government’s incentives for more private investment should also gradually unfold their positive impact.

In services, too, no signs of solid economic recovery are visible. Retail sales in real terms have been basically flat. On a positive note, inflation rates have stabilized at a low level. However, consumer sentiment remains subdued; this is likely also related to the tense situation in the labor market. Many people are worried about their jobs and income development. In services, too, hopes rest on the planned fiscal policy impulses from the federal government.

Overall, the German economy continues to struggle. But the glass now looks more half full than half empty. It is now important that the federal government’s investment packages can unfold their effect and that trade relations with the United States become more predictable again.

We expect the German economy to expand by 0.2% in 2025. In 2026 and 2027, we predict higher economic growth rates of 1.4% and 1.5%.