REGIONAL REPORT
International Monetary Fund( IMF) in February 2026.
“ The economy began to recover in late 2024 as these shocks started to dissipate, but the pace of recovery has been constrained by new trade-related headwinds. Weak growth in recent years also reflects lacklustre underlying productivity growth, in part due to long-stalled structural reforms, and increasing competition in export markets. Slow economic growth has caused the labour market to soften as unemployment has increased while part-time employment has also been rising. Inflation has been contained, supported by lower energy prices and subdued domestic demand,” it added.
However, the IMF expected the German authorities’ landmark reform of the debt-brake rule in 2025 to help drive a gradual economic recovery. Planned fiscal easing in 2026 – 27 and the lagged effects of monetary loosening were also expected to boost growth over the next few years.
“ Headwinds include rapid population ageing, as the working-age population is projected to decline more sharply than in any other G7 economy over the next five years. Productivity growth is also likely to remain modest, absent further reforms both domestically and at the EU level to improve economic efficiency and foster innovation,” said the IMF.“ We welcome the ongoing economic recovery and the improved outlook for Germany following the recent period of subdued growth amid successive external shocks and structurally weak productivity growth.”
In November 2025, the IMF flagged key external risks such as intensifying geopolitical tensions, escalating trade conflicts and commodity price volatility, which could disrupt the supply of essential inputs into the German economy and undermine confidence, investment and trade. However, effective policy responses and structural reforms— such as boosting labour supply, accelerating digitalisation and cuts in red tape, and deepening the EU Single Market— could support a stronger recovery, it said.
German machine tool industry
The recovery of the German machine-tool industry is now taking shape, according to VDW( the German Machine Tool Builders’ Association).
“ In the second quarter of 2026, incoming orders were
Image: Svetlana Butovskaya, Unsplash.
Cologne, Germany.
Image: Shutterstock. com.
ICE 4 high-speed train at Berlin main railway station. up 12 per cent compared to the same period in the previous year. After a rise of 15 per cent in the first quarter, the first six months have seen an overall growth of 14 per cent. Domestic orders increased by 16 per cent and overseas orders by 13 percent,” confirmed the VDW.
“ Two quarters in a row with a double-digit order increase is an encouraging sign. The slump is behind us and we’ re now on course for better times,” outlined Bernhard Geis, Head of Economics and Statistics, VDW, commenting on the figures.“ However, it’ s too early to give the all-clear. The baseline was low and project business is still making a considerable contribution to growth. There are only limited grounds for talk of a widespread recovery of demand.”
Aviation, defence, electronics and medical technology sectors are driving the demand. The situation, said the VDW, remains challenging in metal processing and mechanical engineering, while the biggest challenges continue to be found in the automotive and supplier industry. Here, the share of total sales for the German machine tool industry dropped to 23 percent in 2025. The largest customer sector
The German economy has been hit with major shocks in recent years, with these adverse effects exacerbated by weak underlying productivity growth
Bernhard Geis, Head of Economics and Statistics, remains mechanical engineering with 27-
VDW. per cent. However, the VDW cautioned that“ this recovery has not yet reached production.” In the second quarter, its calculations estimated a six percent drop on the previous year. In the first six months, production declined by a total of seven per cent to around 5.9 billion euros.
“ However, the improved order situation should make more of an impact over the remaining course of the year,” it stipulated.
There are also signs of stabilisation for Germany’ s machine tool export activities, with deliveries to the U. S. increasing by eight per cent in the first six months. By contrast, exports to its second biggest market, namely China, fell by 24 per cent. In Europe, German machinetool industry exports fell by a total of six per cent in the first six months of the year, according to the VDW.“ France saw positive developments with plus 25 per cent and a return to its position as the third
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