German Economy Faces Third Straight Year of Contraction in 2025
Germany’s economy is expected to contract for an unprecedented third consecutive year in 2025, as Europe’s largest economy grapples with persistent energy costs, Chinese competition, and looming trade uncertainties.
The Handelsblatt Research Institute forecasts a 0.1% decline in GDP for 2025, following contractions of 0.3% in 2023 and 0.2% in 2024, marking the longest economic downturn in Germany’s post-war history.
“The German economy is in the midst of its greatest crisis in post-war history,” HRI chief economist Bert Rürup said. “The pandemic, energy crisis and inflation have made Germans poorer on average.”
The outlook comes ahead of Germany’s February 23 elections, with economic concerns topping voters’ priorities according to December polls. The German central bank has already slashed its 2025 growth forecast to 0.2% from an earlier projection of 1.1%.
Energy costs remain a significant hurdle for German industry, running at roughly twice pre-crisis levels and three to four times higher than US rates. Some relief is expected from the end of 2025 as new liquefied natural gas imports from the US and Qatar begin flowing.
The country’s traditionally strong manufacturing sector faces mounting pressure from China, which has evolved from a key export market into a direct competitor, particularly in the automotive sector. However, German companies are adapting by shifting toward higher-value production.
Goldman Sachs forecasts 0.3% growth for 2025, below the eurozone average of 0.8%. Their analysis suggests targeted auto sector tariffs under potential US trade tensions could reduce German GDP by 0.6%.
Despite these challenges, Germany maintains significant fiscal flexibility with government debt at 64% of GDP, roughly half that of the United States. However, the country’s constitutional debt brake limits borrowing capacity, prompting discussions about potential reforms under the next government.
The Federal Statistical Office is expected to release its first official estimate of 2024 economic performance on January 15, which economists say will likely confirm the continued downturn.
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