German economy regains plus sign, but structural challenges lie ahead

The German economy shakes off the minus sign and emerges from recession: according to preliminary data released on 15 January by the statistics office Destatis, 2025 will end with growth of 0.2 per cent. The same value for the last quarter of the year.

Friedrich Merz's government can breathe a sigh of relief and save itself from the criticism that would have been unleashed in the event of a new contraction. There is no reason to get excited, however.

Looking back, zero-point growth compares with two very bad years for Germany: in 2024, GDP had fallen by 0.5 per cent and in 2023 by 0.9 per cent. Significant growth has been missing since 2022, when economic activity was still completing the rebound from the recession caused by Covid-19. Compared to 2019, German GDP rose by only 0.2 per cent. No other G7 country did worse, "a clear signal that Germany's problems are largely domestic", said Nils Jannsen, of the Kiel Institute for the World Economy (Ifw).

Looking ahead, growth is expected to be around 1% in 2026, not exactly a breakthrough. Nor could it be otherwise: the crisis in the manufacturing sector, increasingly fierce competition from China, declining investment (also down by 0.5% in 2025), stagnating productivity, and the demographic winter are all factors of structural decline. Reversing the trend will be laborious and the boost that will come from the massive public spending programmes announced by the government on infrastructure and defence will be beneficial, but not in itself decisive.

Jannsen (Ifw) predicts that 'as of this year, the expansionary fiscal policy will provide impetus and in 2026 German GDP could grow by around 1 per cent. However, given the challenges of demographic change and structural problems, the outlook remains weak. Expansionary measures can only temporarily mask the difficult framework conditions'.