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Germany on the brink: recession will drag on until 2026 – what now?
Germany's economy has been in recession since 2023. High prices and a shortage of skilled workers are putting a strain on companies. Experts warn of a long road to recovery.
Germany on the brink: recession will drag on until 2026 – what now?
The German economy has been in a deep recession for two years, making it the only country within the European Union that remains in this difficult situation. In this context, as many companies were closed in 2024 as during the financial crisis in 2011. The energy-intensive industry in particular is suffering from high electricity prices, which is further aggravating the economic situation. In addition, the ongoing shortage of workers and high bureaucratic hurdles are leading to an increase in corporate tasks.
According to the Federal Government's economic advisory committee, this is a “pronounced weak phase” that makes a quick recovery seem unlikely. Zero growth is forecast for 2025, while only 1% growth appears possible for 2026. Germany's international competitiveness in particular has suffered from the consequences of the Ukraine war and the associated stoppage of Russian gas deliveries. This was interpreted by the German Chamber of Commerce and Industry as an urgent sign of necessary political measures.
Causes of the crisis and challenges
The problems facing the German economy are diverse. Bureaucracy and long approval processes are slowing down growth significantly. In addition, US President Donald Trump's tariff policy is having a negative impact on the country's export-oriented economy. The ifo business climate index fell to 87.3 points in July 2023, documenting the third decline in a row and reflecting the uncertainty among companies. Short-term problems such as rising interest rates and dependence on gas imports from Russia are also contributing to the stagnation.
A survey by GfK shows that consumer sentiment in Germany is at a low level. Forecasts indicate an impending decline in economic output in 2023, with the Ifo Institute expecting -0.4 percent and the International Monetary Fund (IMF) expecting -0.3 percent.
Political measures and developments
Federal Economics Minister Katherina Reiche plans to introduce measures to ease the burden on companies by mid-July, including a reduction in electricity taxes and reforms to the labor market. Chancellor Friedrich Merz is calling for more work incentives and more flexible working hours. The federal government pays particular attention to the successful integration of women into the labor market through better childcare.
In addition, a comprehensive financial package of 500 billion euros is announced to be invested in infrastructure. However, there are concerns that these funds may not be used for their intended purpose and that financing through loans could jeopardize compliance with EU debt standards. Experts are calling for a realistic view of the future and the promotion of new business models. The expert committee does not expect positive effects from the financial package until 2026 at the earliest.
Given the current situation, the assessment of the situation is often described as “between hope and fear”. Economics Minister Robert Habeck is proposing to introduce subsidies for electricity in industry, but this remains controversial, while Ifo President Clemens Fuest and other experts are instead calling for cuts in bureaucracy and comprehensive tax reforms to encourage investment.
In summary, Germany is facing major economic challenges that require both structural and short-term solutions to get the country back on the growth path. Political and economic uncertainty remains a key issue that must be urgently addressed in order to sustainably stabilize the economy.
It remains to be seen whether the federal government's planned measures can have the necessary effect to stop the negative development and restore confidence in the German economy. This crisis situation offers both risks and opportunities that must be exploited to find new paths to growth and stability.