Germany: Economic and Political Overview
Germany is the top economic power in Europe and the fourth globally. Nevertheless, the country was severely affected by the consequences of the Russia-Ukraine conflict as prior to the invasion, Germany was highly dependent on Russian gas, oil and coal, with around one-third of its primary energy supply coming from Russia. Weak domestic and foreign demand for manufacturing goods, coupled with high uncertainty, dampened equipment investment. The construction sector also struggled due to labour shortages and sluggish domestic demand. Low consumer sentiment led to a higher savings rate, limiting private consumption's contribution to economic growth despite a rise in real disposable income. Domestic demand is expected to drive economic growth in 2026 and 2027. However, persistently high energy costs will continue to undermine the cost-competitiveness of energy-intensive industries. Despite recovering demand from key trading partners, net exports are projected to slightly hinder growth in 2026 and remain neutral in 2027. The current account surplus is anticipated to stay high but below pre-pandemic levels. Economic growth is forecast at 0.7% in 2025 and 1.3% in 2026 as per the EU Commission (0.3% and 1.1%, respectively, according to the IMF), although the possible imposition of new tariffs by the U.S. may have a negative impact on exports.
In 2025, Germany's general government deficit fell to 2.4% of GDP from 2.7% in 2024, remaining well below the 3% EU threshold. However, defence spending from an extra-budgetary fund increased. The deficit is projected to widen to 3.7% of GDP in 2026, as the ramp-up in defence spending and public investment outweighs stable employment and rising wages. Higher healthcare and long-term care contribution rates will also boost revenue, though rising social and defence expenditures will offset much of it. The deficit is forecast to widen further to 4.1% in 2027, with the fiscal stance turning expansionary over the forecast horizon (EU Commission). Government debt stood at 63.5% of GDP at the end of 2025, slightly above its 2024 level (EU Commission). This stability was influenced by weak economic growth, easing inflation, and spending that exhausted the debt brake's borrowing limits. Contributing factors also included defence spending from an extra-budgetary fund and debt-financed investments to establish a capital-based pillar in the pension system. The debt level is expected to climb to 65.8% of GDP in 2026 and 68.0% in 2027. Consumer prices in Germany rose by 2.2% in 2025, the same rate as in 2024 and significantly lower than the rates of 5.9% in 2023, 6.9% in 2022, and 3.1% in 2021. Prior to this period, inflation rarely exceeded 2%, according to Destatis. Energy prices fell by a further 2.4% in 2025, helping lower overall inflation. In 2026, by contrast, a renewed energy shock and CO2 price adjustments mean energy costs are pushing inflation up rather than holding it down. Services inflation, the largest contributor, is likely to slow only slightly due to ongoing wage growth. Overall, HICP inflation came in at 2.3% in 2025 and is projected at 2.9% in 2026 and 2.7% in 2027 (EU Commission).
Unemployment rose with the slowing economy but remains low in absolute terms at 3.8% in 2025, while employment has started to edge down. The IMF forecasts the unemployment rate to stay around 3.2% in the medium term, reflecting both cyclical demand weakness and structural changes, such as job losses in the auto industry due to the transition to electric vehicles. This occurs alongside skills shortages and vacancies in other manufacturing sectors. The labour market is expected to improve as economic growth resumes, though the ageing population will continue to affect labour supply. While employment is edging down, compensation of employees increased by 3.9% year-on-year in Q2 2026, with average gross wages per employee up 4.4%. With a GDP per capita (PPP) of USD 74,004, Germany is among the wealthiest countries in the world (IMF, 2025). Nevertheless, according to data by Destatis, around 21.2% of the country's population is at risk of poverty or social exclusion: in 2025, 16.1% of the population was at risk of poverty, 5.6% was affected by severe material and social deprivation, and 10.3% was living in a household with very low work intensity.
| Main Indicators | 2025 | 2026 (E) | 2027 (E) | 2028 (E) | 2029 (E) |
| GDP (billions USD) | 5,048.06 | 5,452.86 | 5,642.16 | 5,818.88 | 6,003.13 |
| GDP (Constant Prices, Annual % Change) | 0.2 | 0.8 | 1.2 | 1.2 | 0.9 |
| GDP per Capita (USD) | 60,439 | 65,303 | 67,613 | 69,805 | 72,088 |
| General Government Balance (in % of GDP) | -2.7 | -3.8 | -4.2 | -4.1 | -3.9 |
| General Government Gross Debt (in % of GDP) | 62.9 | 64.6 | 66.5 | 68.4 | 70.2 |
| Inflation Rate (%) | 2.3 | 2.7 | 2.3 | 2.0 | 2.2 |
| Unemployment Rate (% of the Labour Force) | 3.8 | 3.9 | 3.5 | 3.2 | 3.0 |
| Current Account (billions USD) | 222.92 | 211.75 | 216.66 | 223.31 | 230.58 |
| Current Account (in % of GDP) | 4.4 | 3.9 | 3.8 | 3.8 | 3.8 |
Source: IMF – World Economic Outlook Database, Latest data available
The German agricultural sector is rather limited: it contributes a mere 0.8% of GDP and employs 1% of the country’s workforce (World Bank, latest data available). To sustain a population exceeding 200 million farm animals, approximately 50% of the agricultural landscape consists of grasslands and arable land designated for feeding purposes. The primary production areas within the agricultural sector, intended for human consumption, encompass not only animal products but also bread cereals, potatoes, sugar beets, oilseeds, fruits, and vegetables. Additionally, specific areas of grassland and crops are allocated for the production of bioenergy and bioresources. According to the national statistical office Destatis, in Germany there are around 255,010 agricultural holdings, of which the majority are sole proprietorships, meaning that most farmers run their businesses alone or with their families. In recent years, the number of holdings dedicated to organic farming has been growing steadily, reaching 28,630. The total agricultural used area amounts to 16.56 million hectares, with an average size of 65 hectares (Destatis). In 2023, almost 14.2% of the total output value of the EU's agricultural industry came from Germany (EUR 76.2 billion – Eurostat, latest data available).
The industrial sector amounts to about 26.8% of GDP and employs 27% of the country’s workforce. Germany is Europe's most industrialized country, and its economy is well diversified: the automotive industry is the country’s largest sector, but Germany also retains other specialized sectors, including mechanical engineering, electric and electronic equipment, and chemical products. Overall, manufacturing activities alone account for about 19% of GDP. The industrial activity is concentrated mainly in the states of Baden-Württemberg and North Rhine-Westphalia, where there are more than half of the 1,600 German manufacturing companies identified as global market leaders. According to the latest data available from Destatis, industrial production was down by 1.1% in 2025, with manufacturing contracting for the third consecutive year. Germany's industry has been impacted by rising foreign competition, high energy costs, persistently elevated interest rates, and uncertain economic prospects. Passenger car production in Germany reached 4.15 million units in 2025, up 2% on the 2024 level, according to the German automobile association VDA. However, the association noted that this figure remains 11% below pre-crisis levels in 2019. Moreover, production in energy-intensive industries fell by 2.6% in 2025 compared to the previous year and is down 17.8% since 2021 (data Destatis).
Germany’s service sector is the leading employer (72% of the workforce) and contributes to 63.7% of the country’s GDP. The sector’s growth in recent years has been primarily driven by a strong demand for business-related services and by the development of new technologies, which contributed to establishing whole new branches in the tertiary sector. The hotel and food services sector also plays an important role, with a total turnover worth EUR 68 billion between Jan-Nov 2024 (+0.6% y-o-y, Destatis). Germany’s banking system comprises three pillars: private commercial banks, public-sector banks, and cooperative banks. The segment with the largest share of assets in the banking system is comprised of privately owned commercial banks, constituting approximately 40% of the total assets, whereas cooperative banks account for around 12%. The public banking sector includes savings banks (Sparkassen), Landesbanken, and DekaBank, the central asset manager for the Savings Banks Finance Group, which together account for slightly more than a quarter of total banking assets. Currently, there are approximately 360 savings banks (European Banking Federation).
Overall, the German economic model relies heavily on a dense network of small and medium-sized enterprises (SMEs), often very open to the international environment: according to the latest data from Destatis, around 55% of the total employed persons work in SMEs, with the proportion of persons employed in micro-enterprises amounting to 18%, while 20% work in small and 15% in medium-sized enterprises.
| Breakdown of Economic Activity By Sector | Agriculture | Industry | Services |
| Employment By Sector (in % of Total Employment) | 1.1 | 26.0 | 73.0 |
| Value Added (in % of GDP) | 0.9 | 25.2 | 64.5 |
| Value Added (Annual % Change) | 0.5 | -1.1 | 0.5 |
Source: World Bank, Latest Available Data. Because of rounding, the sum of the percentages may be smaller/greater than 100%.
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The business rankings model measures the quality or attractiveness of the business environment in a series of countries. It examines separate criteria or categories, covering the political environment, the macroeconomic environment, market opportunities, policy towards free enterprise and competition, policy towards foreign investment, foreign trade and exchange controls, taxes, financing, the labour market and infrastructure.
Source: The Economist Intelligence Unit - Business Environment Rankings 2021-2025
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