Germany’s economy remains fragile as Atradius predicts only slight growth in 2025, with ongoing industrial stagnation and global trade tensions dampening prospects. A new government set to be elected on 23 February will face the challenge of preventing a third consecutive year of economic contraction, according to Frank Liebold, Country Manager Germany at Atradius.

Slow Recovery Amid Economic Challenges

Germany’s economic struggles are reflected in declining exports and weak investment levels. In 2024, exports fell by 0.7%, while investments dropped by 2.7%, marking a continued downturn across key industries such as electrical equipment, mechanical engineering, and automotive manufacturing. Industrial production is forecast to decline by 2% in 2025, with consumer sector growth expected to remain sluggish at 1.3%, weighed down by persistent inflationary pressures.

While Atradius expects Germany’s economy to return to positive growth at 0.4% in 2025, Liebold warns that this marginal increase is far from guaranteed. “Even if the outlook for 2025 and 2026 seems rather bleak, it is not entirely without hope. The new government has the ability to improve conditions for German businesses, but decisive action will be required,” he stated.

Trade Tensions and Industrial Uncertainty

The German automotive industry, a key pillar of the country’s economy, is projected to grow by just 2% in 2025 after shrinking 4% in 2024. Meanwhile, construction output, which fell by 3% last year, is expected to stabilize at a low level, while engineering output remains in negative territory following a 6% decline in 2024.

Further uncertainty stems from U.S. trade policy, which could exacerbate Germany’s economic woes. The return of President Trump has brought renewed threats of tariffs on German cars and EU imports. Recent U.S. tariffs on steel and aluminum have had limited impact, but a proposed 10% tariff on all EU exports could reduce Germany’s GDP growth by 0.3 percentage points in 2025 and 0.4 points in 2026, according to Oxford Economics.

Liebold warns that these trade barriers come at a particularly vulnerable time for Germany’s export sector, which is already struggling to compete with cheaper Chinese products on the global market. “The risk of nearly zero economic growth is increasing, and the German economy cannot afford further stagnation,” he said.

German Businesses Want ‘America First’ Approach for the EU

A recent Atradius survey of 500 German companies found that 52% support an ‘America First’ policy for Germany and the EU, advocating for protectionist measures to shield domestic industries. However, 48% of respondents opposed such policies, arguing that economic isolationism is not a viable strategy in today’s interconnected world.

Instead, businesses are calling for bureaucratic reductions, lower energy costs, tax relief, stable political policies, and solutions to the skilled labor shortage. While many favor protectionist policies, critics argue that Germany’s economic success depends on global trade and cooperation rather than isolationist strategies.

All Eyes on Germany’s Upcoming Election

With the early parliamentary elections on 23 February, Germany’s economic future hangs in the balance. The CDU/CSU leads in the polls, but forming a stable coalition will be key to political and economic stability. Potential partners could include the liberal FDP, the left-wing populist BSW, or the Left Party, depending on their ability to pass the 5% threshold for Bundestag representation.

“The new government will likely be less divided than the previous coalition, which could improve decision-making,” Liebold noted. “However, major structural reforms or economic stimulus measures are unlikely in the short term, meaning that those expecting a rapid turnaround may be disappointed.”

Uncertain Future Despite Necessary Reforms

While cross-party proposals exist to reduce bureaucracy and cut costs, implementation remains the biggest challenge. Economic headwinds, political constraints, and rising populism are limiting Germany’s ability to enact major reforms.

“The need for decisive action is becoming increasingly urgent,” Liebold emphasized. “But whether these measures will actually be implemented remains uncertain. Germany’s democratic parties must work together constructively to address the country’s economic challenges—especially in the face of rising right-wing populism.”

As Germany heads to the polls, the country faces a pivotal moment that will determine whether it can break free from stagnation or face another year of economic struggles.

Germany’s low-wage sector has been shrinking, particularly in eastern Germany, while the at-risk-of-poverty rate is also falling, marking a potential turning point after years of rising inequality. These findings come from the latest income survey conducted by the Socio-Economic Panel (SOEP) at DIW Berlin, which collects data from around 30,000 respondents annually.

Despite real wage losses due to inflation in 2022, the lowest wage group saw relative gains, largely driven by a sharp increase in the minimum wage. As a result, the proportion of low-wage earners nationwide fell from 23.4% to 18.5% among dependent employees, while in eastern Germany, it declined from 38% to 24% since its peak in 2007.

“This is a particularly encouraging trend in eastern Germany. Both the low-wage sector and the at-risk-of-poverty rate have dropped significantly, although they remain above the levels seen in western Germany,” said Markus M. Grabka, author of the SOEP study.

Poverty Risk Declines, Particularly Among Youth and Single Parents

Although overall household income has increased significantly in the long term, rising by 35% since 1995 after adjusting for inflation, the lowest-income households have seen little improvement. In contrast, the wealthiest households have experienced a 58% income increase.

However, recent data suggests a potential shift in poverty trends. For the first time in years, the at-risk-of-poverty rate has begun to decline, particularly in eastern Germany, among children and young people, and within single-parent households.

The poverty rate for single parents has fallen from a peak of 37% in 2018 to 31% in 2022, with an even steeper drop in eastern Germany, where it declined from 43% to 32% over the same period. Government support measures, including expanded maintenance payments and increased tax relief for single parents, appear to have contributed to these improvements.

“The drop in poverty risk is encouraging, but sustained efforts are needed to confirm a lasting trend reversal,” Grabka noted.

Education as a Key to Breaking the Cycle of Poverty

While recent progress is promising, experts warn that targeted investments are needed to further reduce poverty, particularly among children and young people. The rate of early school leavers has increased, heightening concerns about long-term social mobility.

“Without a recognized educational qualification, poverty in adulthood is highly likely,” Grabka cautioned. He recommended greater public investment in education, potentially funded by higher taxes on wealth, to address the structural causes of poverty and provide better opportunities for future generations.

As Germany grapples with economic shifts and inflationary pressures, the latest data offers hope for gradual improvements in income equality and poverty reduction—provided that policymakers continue to prioritize social and economic reforms.

Source: DIW Berlin