Germany recorded its first economic expansion in three years in 2025, marking a tentative return to growth after a prolonged period of stagnation. Gross domestic product increased by 0.2% over the year and final quarter, matching market expectations and finally lifting output slightly above its pre-pandemic level. Although the rebound remains modest, it signals a shift away from the recessionary conditions that had weighed on Europe’s largest economy.
Household consumption and government spending drove the recovery. Consumers increased real spending as confidence improved, while the government accelerated expenditure under Chancellor Friedrich Merz’s large fiscal program. Authorities broke with decades of fiscal restraint by approving a €500 billion infrastructure fund and loosening borrowing limits for defense investment. Strong revenue growth allowed the fiscal deficit to narrow despite a sharp rise in public spending.
Structural Weaknesses
At the same time, structural weaknesses continued to restrain momentum. Private investment fell for another year, with spending on machinery and equipment dropping sharply. Public investment growth, largely concentrated in defense, failed to compensate for the broader decline in business investment, highlighting ongoing hesitation within the private sector.
External trade also remained a drag on growth. Exports declined for the third consecutive year as higher U.S. tariffs, a stronger euro, and competition from China reduced demand for German industrial goods. Imports rebounded strongly, cutting the trade surplus by more than half and exposing the erosion of Germany’s traditional export-led growth model.
Economic prospects for the coming year look more positive but uncertain. Analysts expect fiscal stimulus to gain traction and push growth higher as infrastructure and defense projects scale up. Deep-rooted structural issues—especially in investment, competitiveness, and industrial adaptation—continue to limit the pace of recovery. Short-term stimulus has improved the outlook, but sustainable growth will depend on broader reforms that extend beyond public spending alone.
Reference
Martinez, M. (2026, January 15). German economy breaks 2-year slide with modest 2025 growth. Reuters. https://www.reuters.com/world/europe/german-economy-rose-02-2025-2026-01-15/