German economy finally left stagnation at the end of last year

Finally, some positive news. According to the first tentative estimate of the statistical office, the German economy left stagnation in the final quarter of 2025.

New Year’s traditions vary – ice diving, eating special cakes, or reflecting on the past year’s economic performance. For us, the most relevant is the German statistical office’s tradition of opening the year with a press conference and an assessment of the past economic year. This morning’s press conference delivered mildly positive news on Germany’s economy.

According to the first estimates, the German economy grew by 0.2% year-on-year in 2025, after two years of recession. Private and public consumption were growth drivers, while investments and exports were a drag on the economy. This first estimate is – as always – based on a very tentative estimate for the final quarter of the year. According to the statistical office, the economy grew by 0.2% quarter-on-quarter in the fourth quarter of 2025.

Time to get more positive about Germany

At first glance, 2025 offered little cause for optimism, sending the entire country into national depression. However, this morning’s data suggests that this period of national gloom has come to an end. And there are good reasons to finally be more positive about the German economy. The latest macro data indicates a clear turning point in industry. Industrial orders have now increased for three consecutive months, and even the argument that the November surge was driven by bulk orders does not really concern us; with the fiscal spending programme, more of these bulk orders will come this year.

By 2026, bulk orders could be the new normal, not the exception. Which brings us to the main reason for optimism: fiscal stimulus. The announced infrastructure and defence investment plans will finally begin to reach the economy this year. Critics often overlook the sluggishness of Germany’s federal decision-making process. It took until late last year for parliament to approve the 2026 budget and almost 30 military procurement contracts. With the rapid expansion of defence production capacity, there is a good chance that a large part of the defence spending will remain within the domestic economy and not leak to other countries.

In fact, we see the defence sector as a potential positive surprise in 2026. Last but not least, even though corporates never tire of complaining about elevated energy costs, the government’s decision to bring those costs down to one-third of their current levels should bring further relief, if implemented.

Private consumption will lag behind

While industry should stage a decent rebound, private consumption will remain muted in 2026. Over the last four years, German unemployment has increased by some 500,000 people. This gradual worsening reflects textbook economics: with the economy effectively stagnating for more than five years and industry facing severe structural challenges, a deterioration in the labour market was inevitable.

This deterioration appears set to continue, as the number of corporate insolvencies has not yet declined. With ongoing uncertainty about the future of Germany’s pension system and anticipated higher costs associated with demographic change, it remains difficult to foresee a significant pickup in private consumption in the near term.

The three Rs: from rebound to recovery, only with reforms

An economic liftoff is clearly in the making, and we expect some 1% GDP growth for this year. However, the economy’s problems are deeply rooted, often structural and largely self-made, except for the China problem. Solving these issues quickly is impossible. This is a completely different challenge from some 20 years ago, when Germany was the ‘sick man of Europe’.

This time around, the economy needs an almost complete makeover, ranging from well-known measures such as reducing red tape and introducing e-government to mastering and lowering the financial burden of demographics or through tax cuts. It is up to German Chancellor Friedrich Merz and his government to implement these reforms this year and turn a long-awaited rebound into a sustainable recovery.

In short, as regards Germany's growth prospects, the corn's about to pop. However, a healthy diet includes more than only popcorn.

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