Economic Outline

Economic Indicators

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.

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