Germany’s economy has endured three consecutive years of instability, marked by weak corporate sentiment and a rise in business insolvencies. Over this period, only two quarters recorded positive growth, and despite policy efforts by the new coalition government, confidence remains subdued. However, projections for 2026 suggest a cautious recovery, with GDP growth estimates ranging from +0.6% to +1.5%. This anticipated improvement is expected to be driven by targeted public investments in infrastructure and defense, along with a favorable calendar effect: more working days due to public holidays falling on weekends.
Nonetheless, industry groups and economic experts emphasize that sustained recovery will require structural reforms. Persistent challenges include high energy prices, increasing social security contributions, bureaucratic inefficiencies, and slow approval processes, all of which continue to hinder competitiveness.
Business confidence weakened further in late 2025. The ifo Business Climate Index dropped to 87.6 in December, down from 88.0 in November, reflecting dimmer outlooks for the coming months. Meanwhile, government spending as a share of GDP reached 50.2% in 2025, slightly above the EU average of 49.6% and higher than in major economies like the U.S. (39.6%), Japan (41.3%), and the U.K. (46.9%).
Labor cost burdens remain high. In 2024, taxes and social contributions accounted for 47.9% of total labor costs for average single earners without children—second highest among OECD nations after Belgium and well above the OECD average of 34.9%. This ratio is notably lower in non-EU countries such as the U.S. (30.1%) and the U.K. (29.4%), raising concerns about Germany’s appeal to investors.
Trade data for November 2025 showed exports declining by 2.5% month-on-month to €128.1 billion, and down 0.8% compared to the same month in the previous year. Imports rose by 0.8% to €115.1 billion, resulting in a trade surplus of €13.0 billion. The U.S. remained the top export destination, though shipments there fell by 4.2% from October and were 22.9% lower than in November 2024—likely due to new U.S. import tariffs. In contrast, exports to China increased by 3.4% to €6.5 billion.
On a more positive note, real manufacturing orders rose 5.6% in November 2025 compared to the prior month, seasonally adjusted. Excluding large contracts, growth was 0.7%. Over the three-month period from September to November, orders were up 4.0%. Industrial output followed a similar trend, increasing 0.8% in November, with a 0.7% gain over the three-month comparison.
Inflation eased unexpectedly in December 2025, falling to +1.8% year-on-year after peaking at +2.4% in September. Services inflation remained elevated at +3.5%, driven by wage increases and the upcoming minimum wage hike in January 2026. Food prices rose only 0.8%, while energy costs declined by 1.3% year-on-year, offering some relief. Still, Germany’s energy prices remain high relative to global benchmarks.
Core inflation, which excludes food and energy, decreased from +2.7% in November to +2.4% in December. For the full year 2025, inflation averaged +2.2%, consistent with 2024. Forecasts for 2026 project a slight dip to between +1.8% and +2.2%, aided by the removal of the gas surcharge and reduced grid fees.
Renewable energy’s share in Germany’s power mix continued to grow. In Q3 2025, renewables accounted for 64.1% of domestic electricity generation, producing 98.3 billion kWh—2% more than the same period in 2024. Wind power led the expansion, growing 10.5% and contributing 26.8% of total generation. Solar output rose 3.2%, reaching 24.1% of the mix, with both sources benefiting from recent capacity additions.
Additional insights come from KPMG’s global research initiatives, including the CEO Outlook 2025—based on interviews with 1,350 executives worldwide, including 125 in Germany—and the Future Readiness Monitor 2025, which surveyed 570 German business leaders on investment strategies, generative AI, ESG, and long-term resilience.
— news from KPMG
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Economic Key Facts Germany
Three consecutive years of crisis, poor sentiment among many companies, more corporate insolvencies: the German economy is in rough waters. The sobering balance sheet for the past three years: just two quarters of growth. Even the policies of the new black-red coalition have not yet brought about a change in sentiment. n nHowever, things are expected to pick up in 2026, albeit only cautiously. Depending on the forecast, growth of between +0.6% and +1.5% is expected. Growth in 2026 is likely to be driven mainly by special factors: billions in government spending on infrastructure such as roads and railways, as well as on defense. In addition, more public holidays will fall on weekends, meaning that there will be more working days in 2026 than in the previous year. n nHowever, according to associations and economists, a real upturn in Germany is not to be expected without far-reaching reforms. High energy costs, rising social security contributions, lengthy planning and approval procedures, and excessive bureaucracy continue to weigh on the German economy. n nThe mood among companies in Germany has also deteriorated again. The ifo Business Climate Index fell to 87.6 points in December 2025, down from 88.0 points in November 2025. This was due to poorer expectations for the coming months. n nThe public expenditure ratio, which indicates the state’s influence on an economy, is calculated as total government expenditure as a percentage of GDP. According to the EU Commission, this amounted to 50.2% in Germany in 2025, slightly above the EU average of 49.6% and the public spending ratio of other major economies such as the United Kingdom (46.9%), the USA (39.6%) and Japan (41.3%). n nAccording to the OECD, the share of taxes and social security contributions in total labor costs for average earners in Germany was 47.9% in 2024 for singles without children. This puts Germany in second-worst place among the 38 OECD member states after Belgium and well above the OECD average of 34.9%, which detracts from Germany’s attractiveness as an investment location. The rate is also significantly lower in countries outside the EU, such as the United Kingdom (29.4%) and the United States (30.1%). n nThe current forecasts by German economic research institutes and government organizations for GDP growth in Germany range between +0.6% and +1.5% for the calendar year 2026 and between +1.0% and +1.6% for 2027: n nGerman exports suffered a setback in November 2025. They fell by 2.5% compared to the previous month of October 2025 to €128.1 billion. Compared to November 2024, exports recorded a decline of 0.8%. n nConversely, goods worth €115.1 billion were imported – an increase of +0.8% compared to the previous month of October 2025. The foreign trade balance thus closed with a surplus of +€13.0 billion. n nMost German exports in November 2025 were once again destined for the US. Goods worth €10.8 billion were delivered there, but this was 4.2% less than in October 2025. Compared with November 2024, Germany’s exports to the world’s largest economy were even 22.9% lower. This development is likely to be due to the newly introduced US import tariffs. Exports to the People’s Republic of China, on the other hand, rose by 3.4% to €6.5 billion in November 2025 compared with October 2025. n nReal (price-adjusted) order intake in the manufacturing sector rose by +5.6% in November 2025 compared to October 2025, adjusted for seasonal and calendar effects. Excluding large orders, order intake was +0.7% higher than in the previous month. In the less volatile three-month comparison, incoming orders from September 2025 to November 2025 were +4.0% higher than in the previous three months. n nA similar picture emerges in industrial production: real (price-adjusted) production in the manufacturing sector rose by +0.8% in November 2025 compared with October 2025, adjusted for seasonal and calendar effects. In the less volatile three-month comparison, production from September 2025 to November 2025 was +0.7% higher than in the previous three months. n nThe inflation rate in Germany fell surprisingly sharply in December. Goods and services rose in price by +1.8% compared with the same month last year. In October and November 2025, inflation was +2.3% in each month, after peaking at +2.4% in September 2025. n nIn December 2025, services became noticeably more expensive, rising by 3.5%. This is due to increased wages, which companies are passing on to customers. The increase in the minimum wage on January 1, 2026, is also expected to have a price-increasing effect. Food prices in December were 0.8% higher than in the same month of the previous year. This figure is well below the general inflation rate. Nevertheless, people are noticing in their daily shopping that food prices are significantly higher overall than they were a few years ago. There has been some relief in energy prices: according to statistics, gasoline, electricity, and gas were 1.3% cheaper in December 2025 than a year earlier. However, Germany still has comparatively high energy prices by international standards. n nCore inflation, which is particularly closely watched by economists and excludes volatile food and energy prices, fell from +2.7% in November 2025 to +2.4% in December 2025. n nFor 2025 as a whole, the cost of living rose by an average of +2.2%, similar to 2024. For the new year 2026, economic research institutes are forecasting a slight decline to +1.8% to +2.2%. Consumers will be relieved by, among other things, the elimination of the gas surcharge and lower grid fees. n nRenewable energies account for an increasing share of the electricity mix in Germany. In the third quarter of 2025, they accounted for 64.1% of domestic electricity generation. A total of 98.3 billion kilowatt hours of electricity were generated in Germany and fed into the grid in the summer. That was two percent more than in the same period of the previous year. n nAmong renewables, the share of electricity from wind power increased particularly strongly, rising by +10.5% in the third quarter compared with the previous year. Wind power thus remained the most important energy source, accounting for 26.8% of the total. Electricity generation from photovoltaics—i.e., solar energy—increased by +3.2% and accounted for a share of 24.1%. Maximum values were recorded in both areas due to expansion. n nThe KPMG Global Navigator offers insights into global growth prospects, opportunities, and challenges. n nOur CEO Outlook 2025, for which 1,350 CEOs of large companies around the world were surveyed, including 125 CEOs in Germany, also provides assessments of the economic situation, generative AI, ESG, and other current topics. n nOur Future Readiness Monitor 2025, for which 570 top decision-makers in the German economy were surveyed, also provides an assessment of German companies’ own future viability in light of new opportunities and complex tasks, their investment plans, and their assessment of trends in the coming years.