German economy at a crossroads: recovery or further stagnation?

German economy at a crossroads: recovery or further stagnation?

Bundesbank President Joachim Nagel analyzed the current situation of the German economy at the “Frankfurt Euro Finance Summit” on June 16, 2025 and gave a mixed forecast. While Nagel emphasizes that the German economy could narrowly miss a third year of zero growth in 2025, he also recognizes the possibility of a slight increase in overall economic output on an annual average. This positive turnaround was particularly motivated by an unexpectedly strong increase in gross domestic product (GDP) in the first quarter of 2025 of plus 0.4 percent, which was twice as high as originally calculated n-tv.

However, there are numerous challenges that complicate the path to economic recovery. Nagel emphasizes that growth-damaging tariff effects, particularly through US trade policy, have a noticeable impact on economic development. The Bundesbank's economic forecast published at the beginning of June also predicted GDP stagnation for 2025, which underlines the cautious expectations. The economic environment was characterized by an almost stagnant economy in the winter half of 2024/25, when the GDP rate was -0.2 percent in the fourth quarter of 2024 and only recorded a recovery in the first quarter of 2025, according to this Bundesbank.

Economic factors and challenges

A significant factor for the German economy is exports, which unexpectedly collapsed at the end of 2024 but recovered in the first quarter of 2025. Bring forward effects on exports to the USA due to higher US tariffs played a role here. While corporate investments fell only slightly in the winter half of the year and private housing construction grew noticeably, private consumption was more dynamic than expected. This was supported, among other things, by a robust labor market and weaker inflation.

However, there are signs of a future slowdown. The GDP forecast calls for stagnation in the second quarter of 2025 and a slight decline in the third quarter. The ongoing US economic policy could further dampen the growth of the German economy, especially in 2025. Market researchers assume that exports and business investments will decline significantly in 2025.

Fiscal policy and outlook

Another aspect is the currently improved fiscal policy situation, which is evident after the debt brake was relaxed in March 2025. This transformation could reduce the federal deficit to 2.2 percent in 2025, before rising again to 4.2 percent from 2026 to 2027. Strong growth in government spending on defense and infrastructure will support the recovery from 2026 onwards, while the labor market situation will initially weaken before a recovery begins. In addition, wages are expected to initially rise more slowly in 2025 before increasing again from 2026.

The inflation rate, measured by the European Harmonized Index of Consumer Prices, was 2.1 percent in May 2025, which is 0.1 percentage points lower than in the forecast from December 2024. A cumulative reduction in GDP growth of around 0.75 percentage points is expected over the forecast period, which increases the uncertainties about the future economic development of the Federal Republic.