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, subdued demand for German exports, higher US tariffs, and meagre domestic demand continue to have a dampening effect. Exports are unlikely to be a significant driver of 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 agreement may not be permanent. The ongoing geopolitical turbulences contribute 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 higher 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 third quarter of 2025, gross domestic product stagnated, following a slight contraction of 0.2% in the second quarter of 2025. Interestingly, corporate investments and public spending increased while private consumption and exports were a drag on economic growth.

German industry continues to struggle. No upward trend is yet visible in production, and the subdued development in incoming orders also does not indicate a rapid increase. According to the ifo Business Climate Index, expectations deteriorated in November. At least the current situation is being assessed somewhat more positively than it was in October. The preliminary Purchasing Managers’ Index also indicates persistently weak development for the industry. The still cautious domestic demand and only moderately growing global economy continue to weigh on German industry. The emerging impact of the federal government’s investment packages should now gradually give German industry more momentum. Noticeable upward tendencies are already becoming apparent in the construction sector. However, persistent supply chain threats, above all when it comes to semiconductors or rare earths, increase costs and uncertainty. 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 largely 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. 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.

Overall, the German economy continues to struggle. But the glass now looks increasingly more half full than half empty. It is now important that the federal government’s investment packages can unfold their effect. In addition, more structural reforms are needed to reduce bureaucracy and production costs.

We expect the German economy to expand by 0.3% in 2025. In 2026 and 2027, we predict higher economic growth rates of 1.4% and 1.5%. Inflation rates will slowly decrease to below two percent and the fiscal deficit will reach four percent in 2026.