Germany: a change of direction?

When a new German chancellor was appointed in May 2025, there was a general optimism that a difficult period time for country – for its economy, leadership position in Europe and role in the global economy – could end. That has proved not to be the case. Relations with the US are strained; Germany failed to be selected as an alternate member of the UN Security Council; Germany no longer is a growth model for the rest of Europe to follow. Rather, it lags behind.

GDP and GDP per head

However, at market exchange rates Germany is still the third largest G20 economy after the US and China. It has the third highest GDP per head at PPP of the G20, behind the US and Saudi Arabia. It still has a significant presence. In common with many advanced economies, though, Germany’s population is expected to shrink over the next 25 years, with a rising share of those aged over 65.

Inflation

Overall (CPI all items) inflation has been above 2% for three consecutive months, pushed higher by higher oil and gas prices. Core inflation is lower.  If oil prices stay at around $100/barrel, inflation could easily be pushed up to 3.0% or higher.

 GDP growth

GDP growth in 2025 was just 0.2%. The IMF sees 2026 growth at 0.8% on the basis of a relatively quick end to the Iran war. The German government has cut its growth forecast to 0.7%. If oil prices remain around $100/barrel, GDP growth could be very close to zero in 2026.

Emissions

CO2e emissions per head are almost twice those of France. The main reason is that there is no nuclear power generation in Germany. Germany is, however, on track for net zero in 2050 on our estimates. One of only two G20 countries to be on track for that.

Fiscal Position

On the IMF's latest forecast (April 2026) government debt will rise to 72% of GDP by 2030. The easing of the debt brake to allow higher defence and infrastructure spending is the main reason.

External Position

Germany retains a very strong external position, despite concerns about Germany's fading exports.

Money and Credit

Private sector credit has declined as a share of GDP since 2020. Money growth has picked up but is still weak. The policy rate is very likely to be nudged higher in June on the basis of concern about the inflation trend even though it may well be "transitory".

Governance and Competitiveness

Germany scores highly on all the main governance indicators.