“ Germany is facing major challenges such as continuing labour shortages combined with rising trade fragmentation, the threat of U. S. tariffs and increasing competition from China in global markets.”
Traditionally the powerhouse of European industry, and a hotbed of research and innovation, the Germany economy has shown little growth over the last few years. An ageing population, labour shortages and high labour costs are major challenges in Germany, as they are in some other European countries.
The loss of competitiveness combined with rising trade fragmentation, the threat of U. S. tariffs and increasing competition from China in global markets are major hurdles for German industry. Energy prices remain elevated, not only historically and relative to the U. S. but also relative to many neighbouring European countries. Geopolitical tensions, including conflict in Ukraine and Gaza, are also escalating concerns.
Economic forecast
FACING THE FUTURE
We highlight selected economic and industrial forecasts, as well as machine tool trends, in Germany for manufacturers.
In June this year, the Bundesbank commented that the recovery of the German economy is being delayed by uncertainty surrounding international trade policy. Only gradually, it said, will economic activity be boosted by fiscal measures. The German economy, it added, will continue to“ tread water” in the current year.
“ The new U. S. tariffs and uncertainty about future U. S. policy are dampening economic growth for the time being,” said Bundesbank President, Joachim Nagel, presenting the Bundesbank’ s new‘ Forecast for Germany’ on 6 June 2025.“ This has hit German industry at a time when it had begun to stabilise after a long period of weakness.”
However, the sharp rise in government defence and infrastructure expenditure is likely to cause a marked surge in demand and an increase in gross domestic product( GDP) from 2026 onwards, said the bank. Moreover, according to the new forecast, inflationary pressures in Germany are continuing to ease.“ The‘ Forecast for Germany’ therefore also provides good news for consumers and the economy,” added Mr Nagel.
According to the Bundesbank, calendar-adjusted GDP is expected to stagnate in 2025. However, the Bundesbank’ s experts expect stronger growth rates of 0.7 % and 1.2 % for 2026 and 2027. Compared to the‘ December Forecast for Germany’, the growth outlook has therefore been revised downwards for 2025 and upwards for 2027. According to the Bundesbank’ s experts, the outlook is clouded in the short term by the protectionist trade policy of the United States and the associated uncertainty.
“ Overall, exports will decline significantly in 2025 and increase only slightly next year. Reduced momentum in industrial production due to tariffs will contribute to a slowdown in the labour market and weigh on wage growth. From 2026 onwards, the expansionary fiscal policy and the lessened growth-dampening impact of U. S. economic policy will lead to a marked recovery for the German economy,” said the bank in June this year.
Following the easing of the debt brake, fiscal policymakers are financing a substantial portion of spending, particularly on defence and government infrastructure, via loans. Government consumption and, above all, government investment will therefore rise steeply from 2026 onwards, said the bank.
“ We expect the additional government spending on defence and infrastructure to significantly increase GDP growth by the end of 2027”, said Bundesbank President, Joachim Nagel.
Although, said the bank, the German government deficit ratio is likely to decline further this year, it will then rise sharply to just over 4 % by 2027. The significant increase is largely attributable to the fiscal package which includes not only higher spending on defence and government
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