Economy revives in Q4 2025

GDP growth returns: Germany's GDP increased 0.3% in seasonally adjusted quarter-on-quarter terms in Q4, following a flat reading in the prior quarter and marking the strongest expansion in three quarters. On a year-on-year basis, economic output expanded 0.6% in Q4, following a 0.3% expansion in the prior quarter. As a result, in 2025 as a whole, GDP grew 0.2%, up from 2024’s 0.5% contraction and marking the end of a two-year recession.

Domestic demand drives improvement: Compared to the prior quarter's data, figures in Q4 improved for private consumption (+0.5% in seasonally adjusted quarter-on-quarter terms vs 0.0% in Q3), government consumption (+1.1% vs +0.6% in Q3), fixed investment (+1.0% vs +0.3% in Q3) and exports of goods and services (-0.6% vs -0.9% in Q3). In contrast, the reading for imports of goods and services worsened in Q4 (-0.3% vs +1.0% in Q3). The economic expansion was driven mainly by domestic demand, with growth in private spending and fixed investment boosted by past ECB rate cuts. In contrast, net trade weighed on GDP, as elevated global trade tensions, a strong euro and weaker price competitiveness continued to pressure the external sector.

GDP growth to gain traction in H2 2026: Our Consensus is for German economic growth to hover around Q4’s rate in H1 2026, before accelerating slightly in the second half of the year as fiscal stimulus and increased defense spending kick in. That said, GDP growth is set to remain weak, with an uncertain geopolitical backdrop weighing on the external sector. Moreover, in the case of a prolonged closure of the Strait of Hormuz due to the U.S.-Iran conflict, higher energy costs could push up inflation, hitting both domestic consumption and the industrial sector.

Panelist insight: Commenting on the outlook, EIU analysts stated: “EIU's baseline forecast for Germany is optimistic, given the country’s historic fiscal spending and investment drive, which will support underlying demand in the domestic sector. […] Nevertheless, the scale of the rebound will be highly dependent on the level of investment additionality— that is, the portion of new spending that will go towards new greenfield investment projects. We currently assume that only about half of the new spending will be truly additional, but new budgetary and economic data in the coming quarters will add further clarity.”

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