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- Germany’s economy has started to see some hopes of a recovery, as the biggest EU economy saw modest growth in 2025 after years of contraction.
- Business sentiment and PMI surveys rebounded, driven by strong demand in services and manufacturing.
- Despite improved economic activity, Germany’s economy is still facing job losses, high costs, and cautious outlooks on its economic recovery.
After facing two straight years of recession, Germany’s economy showed modest recovery in 2025, with Chancellor Merz committing to his fiscal stimulus plans that aim to revive Europe’s largest economy.
That said, the recovery is still fragile. Companies remain cautious, job losses continue, and cost pressures haven’t fully eased. Germany may be turning a corner, but the road ahead is still uneven.
The Current Economic Situation
Germany’s economy grew by only 0.2% in 2025. This came after the economy shrank by 0.9% in 2023 and 0.5% in 2024. The fourth quarter of 2025 also showed 0.2% growth, allowing the country to close the year on a slightly stronger note after a turbulent stretch driven largely by weak trade and industrial pressure.
Looking ahead, expectations are improving. The IMF sees growth at 1.1% in 2026, while the German government projects around 1%–1.3%, supported by exports and fiscal stimulus plans under Chancellor Merz. ⁽¹⁾
Germany Quarterly GDP Chart / Source: Trading Economics
? Did you know?
A 0.2% quarterly growth may seem small, but in a €4+ trillion economy like Germany’s, that represents billions of euros in additional economic activity.
German Business Confidence Hits Six-Month High
Germany’s Ifo business confidence improved this month, reaching a six-month high and supporting hopes of economic recovery in Germany. Recent data suggests that activity is picking up across both services and manufacturing, supported by stronger orders and improving expectations. ⁽²⁾
The Ifo report for February came in at 88.6, up from January’s figure of 87.6, and slightly beat its forecast of 88.4. The strong reading came after solid domestic demand and the government’s fiscal stimulus package. ⁽³⁾
Germany Ifo Business Climate Chart / Source: Trading Economics
Ifo President Fuest stated that the German economy is beginning to show signs of improvement. Companies became more satisfied with their current business situation, with the current conditions index rising to 86.7 from 85.7. Business expectations also improved, rising to 90.5 from 89.6. ⁽⁴⁾
Stronger Orders Support Optimism
The rise in sentiment gained support from the manufacturing sector. Germany’s factory orders showed an increase that exceeded expectations in December, reaching its highest level in two years.
Germany Factory Orders Chart / Source: Trading Economics
Additional support came from strong PMI readings, with manufacturing reaching an almost 4-year high while services remained in growth territory.
Manufacturing PMI came in at 50.7, with production increasing for two straight months, marking the strongest pace since October, while new orders posted their fastest growth in nearly four years, supported by a rebound in export demand. ⁽⁵⁾
Economists said that, given the strong order intake in the manufacturing sector, an increase in the Ifo index was overdue. Although the overall level of confidence remains weak compared to historical standards, the direction is now positive. ⁽⁶⁾
However, not everything is improving. Employment has continued to decline, and wage-driven cost pressures remain elevated. Some businesses are still passing higher costs onto consumers. ⁽⁷⁾
Outlook for the First Quarter
Early signals suggest growth could continue in the first quarter, especially if exports recover as expected and fiscal support gains traction.
The data could indicate that growth could extend into Q1, especially if exports rebound and fiscal support gains traction.
However, risks remain as global demand remains uncertain due to major changes in trade, industrial challenges, and labor market weakness.
Overall, the latest figures suggest that Germany’s economy is slowly gaining momentum. While risks remain, business confidence, rising orders, and expanding activity point to a possible recovery ahead.
