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. We expect these effects to start materializing now. At the same time, however, weak demand for German exports and higher US tariffs have a dampening effect. Exports are unlikely to be a significant driver of economic growth. Domestic demand, supported by the fiscal stimulus measures, will have to step in. While private consumption modestly expanded in 2025, it is still subdued. At least, the agreement between the European Union and the United States now provides companies with more planning certainty again, even though it may not be permanent. The ongoing geopolitical turbulence is contributing to businesses and private households only slowly abandoning their pessimism. At least, past ECB interest rate cuts and lower inflation support domestic demand somewhat and decrease the high savings rate. However, businesses and households are mainly waiting for the fiscal stimulus measures to kick in and have a visibly positive effect on the economy.

In the fourth quarter of 2025, gross domestic product increased by 0.2% after stagnating in the third quarter. For the whole year of 2025, the economy also expanded by 0.2%. In 2025, private and public consumption supported the economy, while corporate investment contracted. We expect that the low positive economic growth in the fourth quarter of 2025 will be followed by a somewhat stronger expansion in the first quarter of 2026. Private investment will increasingly support the economy.

German industry continues to struggle. However, production increased by 0.8 percent in November, and incoming orders rose. However, the ifo Business Climate Index has approximately stagnated. The still cautious domestic demand and only moderately growing export demand continue to weigh on German industry. The emerging impact of the federal government’s investment packages should now gradually give German industry more momentum. However, persistent supply chain threats, especially in semiconductors and rare earths, increase costs and uncertainty. Stronger upward momentum is already apparent in the construction sector. In sum, we expect private investment to be a driver of economic growth in the coming quarters and years.

In services, too, there are no signs of a solid economic recovery. Retail sales in real terms have been subdued. On a positive note, inflation rates have stabilized at a low level. However, consumer sentiment remains subdued, which is likely also related to the tense labor market situation. Many people are worried about their jobs and income development. Labor market indicators point to a weakened labor market. In services, too, hopes rest on the planned fiscal policy impulses from the federal government. For the moment, however, private consumption will only gradually develop more momentum and support economic demand. There are no inflationary pressures, and the ECB will probably keep interest rates unchanged at its next meetings.

Overall, the German economy continues to struggle. But a modest recovery is now starting. It is important that the federal government’s investment packages can unfold their effects. In addition, more structural reforms are needed to reduce bureaucracy and production costs.

We expect the German economy to expand by 1.2% in 2026 and 1.4% in 2027. Inflation rates will slowly decrease to below two percent in 2026.