German Economy in Summer 2025: Signs of recovery as economy bottoms out

The German economy is showing signs of recovery. GDP increased considerably at the start of the year, and businesses are feeling more optimistic about the future. However, economic momentum is likely to remain subdued for the time being, partly due to the negative impact of U.S. trade policy. In addition to the negative effects of higher tariffs, the impact of front-running exports to the United States- which contributed to the strong start to the year-will also be felt over the next few quarters. The pace of expansion will pick up noticeably in the coming year, as the greater fiscal leeway of the new German government comes into play. We assume that the expansionary fiscal policy will increase the GDP growth rate by 0.8 percentage points in 2026, while higher U.S. tariffs are expected to dampen growth in sum by 0.3 percentage points this and next year. Against this backdrop, we expect GDP growth rates of 0.3 percent this year (spring forecast: 0.0 percent) and 1.6 percent in 2026 (spring forecast: 1.5 percent), which is slightly higher than our previous forecast. In addition to U.S. trade policy, German exporters are suffering from a significant loss in competitiveness. Inflation is expected to decline to 1.6 percent in 2026, primarily due to lower energy prices, down from 2.2 percent this year. Given rising incomes, private consumption is expected to increase notably this year and next year. Investment is set to bottom out after declining for the past three years. More favorable financing conditions and, in 2026, expansionary fiscal policy will contribute to the recovery of investment. As the economy recovers, the labor market is expected to overcome its current weakness, and unemployment will decline again next year. The government's budget deficit is expected to rise to 3.5 percent of GDP in 2026. A decrease to 2.1 percent is expected for the current year (2024: 2.7 percent).