Germany’s troubled economy shows modest growth after two years of shrinkage

Germany’s economy showed signs of recovery last year, posting modest growth of 0.2% after two consecutive years of contraction, according to data released Thursday by the German Federal Statistical Office. The slight expansion marks a potential turning point for Europe’s largest economy, which had shrunk by 0.5% in 2024 and 0.9% in 2023.

The growth was primarily driven by stronger consumer and government spending, while exports – traditionally a cornerstone of German economic strength – continued to struggle under mounting international pressures. The export sector faced what statistical office head Ruth Brand described as “strong headwinds” stemming from higher U.S. tariffs, a stronger euro, and intensifying competition from China.

“Germany’s export-dependent economy has been particularly vulnerable to these external factors,” said Brand in a statement accompanying the release of the economic data.

Economic observers are expressing cautious optimism for stronger performance in the coming months, as Chancellor Friedrich Merz’s government implements plans to boost infrastructure spending. This initiative aims to address years of underinvestment in critical infrastructure such as bridges and rail networks. Additionally, Germany has committed to increasing defense expenditures in response to heightened security concerns following Russia’s invasion of Ukraine.

The modest return to growth comes after an extended period of economic stagnation that began following the COVID-19 pandemic. Germany’s economic challenges have been compounded by several factors, including elevated energy costs resulting from the Ukraine conflict and increasing global competition in key German industrial sectors, particularly automotive manufacturing and industrial machinery.

Trade relations with the United States have further complicated Germany’s economic recovery. The imposition of higher tariffs on European Union goods has created additional obstacles for German exporters already grappling with competitive pressures. The euro’s appreciation has simultaneously made German products relatively more expensive in international markets, adding another layer of difficulty for export-oriented businesses.

Beyond these immediate challenges, the prolonged period of sluggish growth has highlighted structural weaknesses in the German economy, including bureaucratic inefficiencies and a growing shortage of skilled labor. These factors have hampered Germany’s ability to rapidly adapt to changing global economic conditions.

In the final quarter of 2025, preliminary data indicates the economy grew by 0.2%, maintaining the modest pace seen over the year as a whole. A consortium of leading economists has projected 0.9% growth for the upcoming year, though they caution this forecast could be jeopardized if government spending initiatives are implemented more slowly than anticipated.

The infrastructure and defense spending plans represent a significant shift in fiscal strategy, as Germany attempts to stimulate economic activity through targeted government investment. The approach marks a departure from years of fiscal restraint and acknowledges the need for substantial public investment to revitalize aging infrastructure and boost economic competitiveness.

Market analysts note that Germany’s economic performance remains closely watched across the Eurozone, as it serves as a bellwether for broader European economic conditions. A sustained German recovery could provide momentum for growth across the continent, particularly in countries with close trade relationships to the German industrial sector.

As Germany navigates this tentative economic recovery, policymakers face the challenge of balancing short-term stimulus measures with longer-term structural reforms needed to enhance competitiveness in a rapidly evolving global economy. The success of these efforts will likely determine whether 2025’s modest growth represents the beginning of a sustained economic revival or merely a temporary reprieve from prolonged stagnation.