After slightly contracting for two years in a row, economic activity is expected to broadly stagnate in 2025. Trade tensions are set to significantly weigh on exports, though private consumption is projected to expand slightly in 2025, boosted by increases in purchasing power and lower interest rates. Investment is expected to stagnate this year, inhibited by tighter financing conditions and weaker economic sentiment – both related to the elevated uncertainty. In 2026, growth is projected to rebound to 1.1%, as domestic demand strengthens, driven by continued consumption growth and a gradual recovery in investment. The government deficit is set to remain elevated, and the government debt ratio is expected to increase to 64.7% of GDP in 2026.
| Indicators | 2024 | 2025 | 2026 |
|---|---|---|---|
| GDP growth (%, yoy) | -0,2 | -0,0 | 1,1 |
| Inflation (%, yoy) | 2,5 | 2,4 | 1,9 |
| Unemployment (%) | 3,4 | 3,6 | 3,3 |
| General government balance (% of GDP) | -2,8 | -2,7 | -2,9 |
| Gross public debt (% of GDP) | 62,5 | 63,8 | 64,7 |
| Current account balance (% of GDP) | 6,1 | 5,3 | 5,3 |
Economic activity gradually picking up in 2026
As the new government's policy intentions to boost infrastructure and defense spending have yet to be detailed, they are not included in this forecast. However, their positive effects of on sentiment indicators are taken into account.
The German economy continued to face headwinds throughout 2024. Real GDP contracted by 0.2%, following a decline of 0.3% in 2023. In the second half of 2024, exports decreased by 1.7%, compared to the same period a year before. This reflects strong losses in export market shares, especially to China, but also the US. High uncertainty and tight financing conditions weighed on equipment investment. Private consumption was of limited support to economic growth, as consumer sentiment remained low, and households’ saving rate increased.
In 2025 and 2026, tariffs and increasing global uncertainty are set to exert a drag on consumption, investment, and exports. Positive effects of the new government’s plan to boost infrastructure and defence spending were visible in a turnaround of corporate confidence – partly offsetting the adverse and uncertain external environment.
Lower inflation is set to support real household incomes and underpin a moderate increase in consumption in 2025 and 2026. Strong public investment growth and the expectation of looser fiscal policy are projected to support a gradual recovery in corporates’ equipment investment. Residential construction activity is expected to bottom out in 2025 and start picking up, as shown by the slightly increasing building permits and orders, as well as rising mortgage lending. In addition, public investment growth drives a turnaround of non-residential construction already this year. Exports, however, are set to keep weighing on growth for the third consecutive year. Tariffs and elevated uncertainty add to the structural decline in leading export industries, and the US market will no longer provide a partial buffer against rapidly shrinking exports towards China.
In this context, the strong increase in exports in early 2025 likely reflects a short-lived frontloading of imports, ahead of the implementation of announced tariffs. Overall, exports are projected to contract by 1.9% this year and recover only partially in 2026. The current account surplus is forecast to fall to 5.1% in 2025 and 2026, as adverse developments in exports are partly compensated by cheaper imports.
Overall, real GDP is set to stagnate in 2025 and return to growth, at 1.1%, in 2026.
Economic stagnation leaves its mark on the labour market
As output contracted, employment growth has been decelerating since 2022, with declining employment in manufacturing largely offset by job growth in public services, education, and the health sector. Although the labour market eased slightly, 28% of companies still reported labour shortages in early 2025. The labour market is set to remain tight, as in a context of a rapidly aging population, a mild contraction in employment is offset by stagnating – in 2025 – and then decreasing – in 2026 – labour force. After increasing to 3.6% in 2025, the unemployment rate is set to fall back to 3.3% in 2026, as employment growth picks up again. As inflation decelerates more than nominal wage growth, real wages are set to continue to increase in the short term.
Inflation continues to abate
After subsiding to 2.5% in 2024, HICP inflation is projected to decelerate further to 2.4% in 2025 and 1.9% in 2026. Strong declines on energy wholesale markets in early 2025 herald a deflationary impact of retail energy prices over the forecast horizon. At the same time, wage negotiations are still bound to be driven by past inflation and influence overall wage growth. This is set to lead to some persistency in service inflation.
Public finances strained
In 2025, the general government deficit is projected to decrease slightly to 2.7% of GDP, from 2.8% in 2024. Strong wage growth and increases in the social contribution rates for healthcare and long-term care are set to boost income tax revenues and social contributions. Revenues are set to grow at a similar pace as in 2024. Expenditure growth is expected to slow down compared to 2024, but demographic ageing will likely keep social expenditures structurally elevated.
In 2026, the government deficit is projected to increase again to 2.9% of GDP, as revenue growth slows down on the back of decelerating wage dynamics and expenditure growth remains stable. Overall, the fiscal stance is set to turn slightly contractionary in 2025 and slightly expansionary in 2026. Government debt stood at 62.5% of GDP at the end of 2024 and is expected to increase to 63.8% in 2025 and 64.7% in 2026.