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. After contracting 0.3% in 2023, the country experienced a second year of recession in 2024, when GDP recorded negative growth of 0.2% according to the first estimates by Destatis. 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 2025 and 2026. 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 2025 and remain neutral in 2026. 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 2024, Germany's general government deficit fell to 2.2% of GDP from 2.6% in 2023, driven by the phase-out of energy price relief measures. However, defence spending from an extra-budgetary fund increased. The deficit is projected to decline to 2.0% in 2025, supported by stable employment, rising wages, and the end of tax-free household bonuses. 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 drop further to 1.8% in 2026, with the fiscal stance becoming broadly neutral by 2025 (EU Commission). Government debt stood at 62.7% of GDP at the end of 2023 and remained around the same level throughout 2024 (IMF). 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 remain stable over the forecast horizon. Consumer prices in Germany rose by 2.2% in 2024, 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 are expected to decrease further in 2025 from high levels in 2024, helping lower overall inflation. By 2026, with stabilising wholesale energy prices and CO2 price adjustments, energy costs will no longer contribute to reducing inflation. Services inflation, the largest contributor, is likely to slow only slightly due to ongoing wage growth. Overall, inflation is projected at 2.1% in 2025 and 1.9% in 2026 (EU Commission).

Unemployment rose with the slowing economy but remains low in absolute terms at 3.4% in 2024, while employment continues to grow. 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 nominal wage growth has slowed, real compensation increased by 2.3% year-on-year in Q2 2024, with steady growth in real wages expected in 2025. With a GDP per capita (PPP) of USD 57,914, Germany is among the wealthiest countries in the world (IMF, 2025). Nevertheless, according to data by Destatis, around 20.9% of the country's population is at risk of poverty or social exclusion: in 2024, 15.5% of the population was at risk of poverty, 6% was affected by severe material and social deprivation, and 9.8% was living in a household with very low work intensity.

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