German Economy Returns to Growth for 1st Time in Three Years

Germany’s economy recorded growth in 2025 for the first time since 2022, signaling a tentative recovery after a prolonged period of stagnation. 

The modest rebound has been driven primarily by rising household consumption and increased government spending, though challenges remain in key export sectors.

The country’s industrial powerhouse had struggled with a loss of competitiveness in major export markets, while cautious consumers preferred saving over spending, contributing to consecutive years of slow or negative growth.

Chancellor Friedrich Mertens implemented a sweeping fiscal stimulus plan aimed at boosting economic prospects, though its full impact is expected to unfold gradually.

“After two years of recession, the German economy has returned to growth, thanks largely to stronger household consumption and public spending,” said Ruth Brand, head of the Federal Statistical Office. The economy expanded 0.2% in the fourth quarter of 2025, on both a quarterly and annual basis, in line with Reuters analyst expectations.

Klaus Vistesen, chief economist for the Eurozone at Pantheon Macroeconomics, noted: “The economy remained close to stagnation last year but has improved compared with 2024. We expect Germany to gain momentum in the coming months as investment cycles recover, supported by sustained fiscal stimulus focused on infrastructure and defense spending.”

Germany’s GDP now exceeds 2019 levels by roughly 0.2%, finally recouping losses incurred over the past several years, though growth remains slower than that of many European peers.

Household consumption rose 1.4% in real terms, while government expenditure increased 1.5%. Private investment, however, declined 0.5%, with a 2.3% drop in machinery and equipment spending partially offset by strong public investment, particularly in defense projects.

The fiscal policy shift represents a historic move for Germany, which long adhered to strict budgetary discipline. In March, parliament approved a massive stimulus package, including a €500 billion infrastructure fund and exemptions for large portions of defense investment from borrowing limits.

Despite government spending rising 5.1% in 2025, the budget deficit fell by roughly €8 billion from the previous year, aided by a 5.8% increase in revenues.

Germany’s export-driven economy faced a challenging year, with exports falling 0.3%, marking the third consecutive annual decline. The contraction reflected rising U.S. tariffs, a stronger euro, and increasing competition from China. Vehicle, machinery, and chemical exports declined, while services exports rose 1.1% in real terms. Imports grew 3.6%, following two years of decline.

As a result, Germany’s trade surplus shrank sharply to €110 billion, down from €241 billion in 2024, reaching one of its lowest levels in more than two decades and highlighting the diminished momentum of the country’s traditional export engine.

Carsten Brzeski, head of global macroeconomics at ING, said: “The era of national pessimism appears to be over. There are finally reasons for cautious optimism, with fiscal stimulus serving as the main driver. However, Germany’s economic challenges are structural and deep-rooted; growth will not come overnight. The spark is ready, but the system still requires a healthy diet, not just popcorn.”

ING forecasts 1% GDP growth for 2026, reflecting cautious optimism amid persistent structural hurdles.