German Economy Returns to Growth, but the Recovery Is Uneven

Source: Coindoo Original Title: German Economy Returns to Growth, but the Recovery Is Uneven Original Link: Germany’s economy is no longer shrinking, but calling it a recovery may be premature. What emerged in 2025 was less a natural rebound and more a state-supported pause in a longer reset.

After two years of contraction, economic output edged higher last year. The improvement did not come from factories roaring back to life or exporters reclaiming lost ground. Instead, the lift came largely from public money and resilient consumer spending stepping in where private activity continued to falter.

Key Takeaways

• Germany exited recession in 2025, but growth was narrow and heavily reliant on government spending.
• Manufacturing, construction, and employment remain under significant pressure.
• Exports to the U.S. and China are weakening as competition and trade barriers rise.
• Large public investment plans may stabilize the economy, but structural reforms are critical for a durable recovery.

A fragile turning point

Official figures from Destatis show that overall output increased slightly in 2025, ending a prolonged slump that began after the energy shock and supply disruptions of the early decade. Growth was modest, but enough to signal that the economy may have found a floor.

That stabilization was mirrored at the end of the year, when activity expanded again in the final quarter. Yet the composition of growth revealed an uncomfortable truth: the engines that once powered Europe’s largest economy remain largely stalled.

Factories, builders, and jobs under strain

Germany’s industrial sector continued to shrink for a third consecutive year, underlining how deep the structural problems have become. Construction activity fell even more sharply, extending a multi-year downturn tied to high financing costs and weak demand. At the same time, the labor market lost momentum as manufacturing job cuts accelerated, reversing what had been a long period of steady employment gains.

These trends reflect an economy still adjusting to higher energy costs, disrupted global supply chains, and a tougher trade environment shaped in part by renewed protectionism.

The state steps in

With private investment subdued, Berlin has taken a far more active role. Government officials have committed to a wave of spending aimed at defense and long-neglected infrastructure, arguing that public investment must compensate for years of underfunding.

Business groups cautiously welcome the approach but warn it is not a cure-all. Current environment is described as one of tentative stabilization rather than a true upswing, with confidence remaining fragile across much of the corporate sector.

Trade model under pressure

Germany’s export-heavy growth model is also being tested. While trade within the European Union has provided some stability, shipments to major markets have weakened noticeably. Exports to the United States dropped sharply, and sales to China fell even more, signaling a shift in global demand patterns.

Automakers such as Volkswagen and BMW have reported declining sales in both markets, squeezed by tariffs and intensifying competition from Asian manufacturers. German officials increasingly acknowledge that China is evolving from a customer into a direct rival.

Economic strain spills into politics

The economic malaise is feeding broader social and political tension. Polls show rising support for populist movements, reflecting voter frustration with stagnation, job insecurity, and deteriorating public services.

Those concerns were highlighted by recent infrastructure failures that exposed the consequences of years of underinvestment. Local governments now face an investment backlog running into the hundreds of billions of euros, with roads and utilities among the most neglected assets.

Small signs of momentum

There are, however, hints that activity may be stirring. Factory orders and industrial output rose late last year, helped in part by defense-related contracts. The pickup encouraged some companies to raise forecasts, fueling cautious optimism that public spending could eventually draw private investment back in.

Still, economists warn that without deeper reforms to boost competitiveness and demand, fiscal stimulus alone may only buy time rather than deliver a lasting revival.