The economic context of Germany

Economic Indicators

Germany is the top economic power in Europe and the fourth globally. Nevertheless, the country was severely affected by the consequences of the Russia-Ukraine conflict as prior to the invasion, Germany was highly dependent on Russian gas, oil and coal, with around one-third of its primary energy supply coming from Russia. After contracting 0.3% in 2023, the country experienced a second year of recession in 2024, when GDP recorded negative growth of 0.2% according to the first estimates by Destatis. Weak domestic and foreign demand for manufacturing goods, coupled with high uncertainty, dampened equipment investment. The construction sector also struggled due to labour shortages and sluggish domestic demand. Low consumer sentiment led to a higher savings rate, limiting private consumption's contribution to economic growth despite a rise in real disposable income. Domestic demand is expected to drive economic growth in 2025 and 2026. However, persistently high energy costs will continue to undermine the cost-competitiveness of energy-intensive industries. Despite recovering demand from key trading partners, net exports are projected to slightly hinder growth in 2025 and remain neutral in 2026. The current account surplus is anticipated to stay high but below pre-pandemic levels. Economic growth is forecast at 0.7% in 2025 and 1.3% in 2026 as per the EU Commission (0.3% and 1.1%, respectively, according to the IMF), although the possible imposition of new tariffs by the U.S. may have a negative impact on exports.

In 2024, Germany's general government deficit fell to 2.2% of GDP from 2.6% in 2023, driven by the phase-out of energy price relief measures. However, defence spending from an extra-budgetary fund increased. The deficit is projected to decline to 2.0% in 2025, supported by stable employment, rising wages, and the end of tax-free household bonuses. Higher healthcare and long-term care contribution rates will also boost revenue, though rising social and defence expenditures will offset much of it. The deficit is forecast to drop further to 1.8% in 2026, with the fiscal stance becoming broadly neutral by 2025 (EU Commission). Government debt stood at 62.7% of GDP at the end of 2023 and remained around the same level throughout 2024 (IMF). This stability was influenced by weak economic growth, easing inflation, and spending that exhausted the debt brake's borrowing limits. Contributing factors also included defence spending from an extra-budgetary fund and debt-financed investments to establish a capital-based pillar in the pension system. The debt level is expected to remain stable over the forecast horizon. Consumer prices in Germany rose by 2.2% in 2024, significantly lower than the rates of 5.9% in 2023, 6.9% in 2022, and 3.1% in 2021. Prior to this period, inflation rarely exceeded 2%, according to Destatis. Energy prices are expected to decrease further in 2025 from high levels in 2024, helping lower overall inflation. By 2026, with stabilising wholesale energy prices and CO2 price adjustments, energy costs will no longer contribute to reducing inflation. Services inflation, the largest contributor, is likely to slow only slightly due to ongoing wage growth. Overall, inflation is projected at 2.1% in 2025 and 1.9% in 2026 (EU Commission).

Unemployment rose with the slowing economy but remains low in absolute terms at 3.4% in 2024, while employment continues to grow. The IMF forecasts the unemployment rate to stay around 3.2% in the medium term, reflecting both cyclical demand weakness and structural changes, such as job losses in the auto industry due to the transition to electric vehicles. This occurs alongside skills shortages and vacancies in other manufacturing sectors. The labour market is expected to improve as economic growth resumes, though the ageing population will continue to affect labour supply. While nominal wage growth has slowed, real compensation increased by 2.3% year-on-year in Q2 2024, with steady growth in real wages expected in 2025. With a GDP per capita (PPP) of USD 57,914, Germany is among the wealthiest countries in the world (IMF, 2025). Nevertheless, according to data by Destatis, around 20.9% of the country's population is at risk of poverty or social exclusion: in 2024, 15.5% of the population was at risk of poverty, 6% was affected by severe material and social deprivation, and 9.8% was living in a household with very low work intensity.

Main Sectors of Industry

The German agricultural sector is rather limited: it contributes a mere 0.8% of GDP and employs 1% of the country’s workforce (World Bank, latest data available). To sustain a population exceeding 200 million farm animals, approximately 50% of the agricultural landscape consists of grasslands and arable land designated for feeding purposes. The primary production areas within the agricultural sector, intended for human consumption, encompass not only animal products but also bread cereals, potatoes, sugar beets, oilseeds, fruits, and vegetables. Additionally, specific areas of grassland and crops are allocated for the production of bioenergy and bioresources. According to the national statistical office Destatis, in Germany there are around 255,010 agricultural holdings, of which the majority are sole proprietorships, meaning that most farmers run their businesses alone or with their families. In recent years, the number of holdings dedicated to organic farming has been growing steadily, reaching 28,630. The total agricultural used area amounts to 16.56 million hectares, with an average size of 65 hectares (Destatis). In 2023, almost 14.2% of the total output value of the EU's agricultural industry came from Germany (EUR 76.2 billion – Eurostat, latest data available).

The industrial sector amounts to about 26.8% of GDP and employs 27% of the country’s workforce. Germany is Europe's most industrialized country, and its economy is well diversified: the automotive industry is the country’s largest sector, but Germany also retains other specialized sectors, including mechanical engineering, electric and electronic equipment, and chemical products. Overall, manufacturing activities alone account for about 19% of GDP. The industrial activity is concentrated mainly in the states of Baden-Württemberg and North Rhine-Westphalia, where there are more than half of the 1,600 German manufacturing companies identified as global market leaders. According to the latest data available from BDI, industrial production was down by 3% in 2024, marking the third consecutive year of decline. Germany's industry has been impacted by rising foreign competition, high energy costs, persistently elevated interest rates, and uncertain economic prospects. Passenger car production in Germany reached 4.1 million units in 2024, roughly matching the 2023 level, according to the German automobile association VDA. However, the association noted that this figure remains 12% below pre-crisis levels in 2019. Moreover, production in energy-intensive industries fell by 2.2% from July to September 2024 compared to the previous three months (data BDI).

Germany’s service sector is the leading employer (72% of the workforce) and contributes to 63.7% of the country’s GDP. The sector’s growth in recent years has been primarily driven by a strong demand for business-related services and by the development of new technologies, which contributed to establishing whole new branches in the tertiary sector. The hotel and food services sector also plays an important role, with a total turnover worth EUR 68 billion between Jan-Nov 2024 (+0.6% y-o-y, Destatis). Germany’s banking system comprises three pillars: private commercial banks, public-sector banks, and cooperative banks. The segment with the largest share of assets in the banking system is comprised of privately owned commercial banks, constituting approximately 40% of the total assets, whereas cooperative banks account for around 12%. The public banking sector includes savings banks (Sparkassen), Landesbanken, and DekaBank, the central asset manager for the Savings Banks Finance Group, which together account for slightly more than a quarter of total banking assets. Currently, there are approximately 360 savings banks (European Banking Federation).
Overall, the German economic model relies heavily on a dense network of small and medium-sized enterprises (SMEs), often very open to the international environment: according to the latest data from Destatis, around 55% of the total employed persons work in SMEs, with the proportion of persons employed in micro-enterprises amounting to 18%, while 20% work in small and 15% in medium-sized enterprises.

 

Breakdown of Economic Activity By Sector	Agriculture	Industry	Services
Employment By Sector (in % of Total Employment)	1.2	26.5	72.3
Value Added (in % of GDP)	0.8	26.8	63.7
Value Added (Annual % Change)	0.6	-0.5	0.6

Source: World Bank, Latest Available Data. Because of rounding, the sum of the percentages may be smaller/greater than 100%.

 

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Indicator of Economic Freedom

Definition

Definition:

The Economic freedom index measure ten components of economic freedom, grouped into four broad categories or pillars of economic freedom: Rule of Law (property rights, freedom from corruption); Limited Government (fiscal freedom, government spending); Regulatory Efficiency (business freedom, labour freedom, monetary freedom); and Open Markets (trade freedom, investment freedom, financial freedom). Each of the freedoms within these four broad categories is individually scored on a scale of 0 to 100. A country’s overall economic freedom score is a simple average of its scores on the 10 individual freedoms.}}

Score:

72,5/100

World Rank:

29

Regional Rank:

16

 

Business environment ranking

Definition

Definition:

The business rankings model measures the quality or attractiveness of the business environment in the 82 countries covered by The Economist Intelligence Unit’s Country Forecast reports. It examines ten separate criteria or categories, covering the political environment, the macroeconomic environment, market opportunities, policy towards free enterprise and competition, policy towards foreign investment, foreign trade and exchange controls, taxes, financing, the labour market and infrastructure.

Score:

8.31/10

World Rank:

5/82

Source: The Economist Intelligence Unit - Business Environment Rankings 2021-2025

 

Sources of General Economic Information

Ministries

Ministry of Finance
Ministry of Economic Affairs and Energy
Ministry of Food and Agriculture
Ministry of Transport and Digital Infrastructure
Ministry of Education and Research

Statistical Office

Federal Statistical Office

Central Bank

Deutsche Bundesbank

Stock Exchange

Deutsche Börse Group

Economic Portals

German business portal