After a period of political fragmentation and economic uncertainty, Germany appears to be regaining its economic footing. Following two years of recession, with GDP contracting by -0.7% in 2023 and -0.5% in 2024, the country faces both risks and opportunities. A looming trade war with a more protectionist US and Chinese competitiveness threatens its export-driven model, yet the government has launched fiscal expansion plans and announced measures aimed at reviving growth. Germany’s economic model now requires a structural reorientation. The challenges facing the new government echo those of its predecessors: rising global fragmentation, protectionist trends, increasing energy costs and heightened competition, especially from China. To respond, Berlin must pursue structural reforms focused on boosting productivity, alongside strategic public investment. Full-year 2025 growth reached only +0.2%, reflecting slowing exports and high uncertainty. A EUR500bn infrastructure fund, tax incentives for private investment and R&D are intended to stimulate growth. Nevertheless, demographic decline, labour inefficiencies and pension pressures are weighing on mid- to long-term prospects.
The government’s “Autumn of Reforms” is facing delays due to slow progress in cutting red tape and initiating structural reforms. To ensure sustainable growth, Berlin must streamline bureaucracy, advance structural reforms and invest in digital transitions to boost productivity and resilience. Initiatives are underway to accelerate approval procedures as well as the approval of EUR50bn worth of defense orders should give planning certainty over a longer time horizon. As these effects take effect only gradually, growth in 2026 is forecast at +0.9%, still weighed down by low sentiment and a difficult competition environment for German industry, but will pick up to +1.4% in 2027.
Over the longer term, additional steps are planned, including a phased -5pps cut in corporate tax over five years starting in 2028. Yet Germany must also confront budget shortfalls and invest in the green transition and innovation to lift potential growth. German insolvencies have continued to rise following the reinstatement of insolvency laws, which were temporarily suspended during the Covid-19 pandemic and the energy crisis triggered by Russia’s invasion of Ukraine. Stricter financing conditions have further contributed to the upward trend. In 2024, the number of insolvencies increased by +22% year-on-year, reaching an estimated 21,812 cases. The most affected sectors include health and social services, real estate and information and communication services. Looking ahead, a slight moderation in the pace of increase is expected. In 2025, insolvencies rose by +11%, bringing the total to approximately 24,300 cases. By 2026, the growth is expected to slow further, with a +0.6% increase to around 24,450 cases reaching its peak and falling from there by -5.5% to 23,100 cases in 2027.
As in other Eurozone economies, inflationary pressures in Germany are gradually easing, particularly in the energy and food sectors, despite short-term volatility. In 2024, inflation stood at +2.3%, approaching the ECB’s target. In 2025, inflation slowed slightly to 2.2%, primarily due to sticky price pressures in the services sector, which remained between 3% and 4%, and a rebound in food prices. From 2026 onwards, inflation is expected to fall further, reaching +2.1%. This decline is supported by the delayed effects of monetary easing and easing labour cost pressures. However, this trend will reverse in 2027 when the full effects of fiscal stimulus are felt in a weak but already strained labour market and capacity constraints in the construction sector with inflation increasing again to +2.2%. Wage growth, a critical factor for the labour-intensive services sector, surged to +6.1% in 2023 and remained high at +5.1% in 2024. In 2025, wage growth remained high at +5%, due to the catch-up effects on household purchasing power from the period of high inflation, and is forecast to slow to +2.7% in 2026. Upward pressure on wages will persist throughout 2027, with an expected increase of +3%, driven by increased labour demand, particularly from public investment initiatives linked to the national infrastructure fund.
