OECD maintains projection: German economy continues to lag behind
Germany's economic growth this year is lackluster, with an expected GDP increase of only 0.4%, according to the Organisation for Economic Co-operation and Development (OECD). Germany ranks second-to-last among European economies, surpassed only by Austria and Norway in terms of growth rate. By 2026, the growth rate is projected to reach 1.2%, up from the previously forecast 1.1%.
The first quarter of the year saw a surprisingly robust 0.4% growth in Germany's economy. This growth can be attributed to the relatively swift formation of a functional government and the reform of the debt brake, which have reduced political uncertainty and improved investor and consumer confidence. Both private consumption and private investments rose more than expected in the first quarter. Public investments in defense and infrastructure are expected to increase significantly this year, while infrastructure investments are predicted to pick up next year, contributing to an economic boost.
However, trade policy uncertainty, particularly due to high tariffs announced by U.S. President Donald Trump, is dampening investments in export-oriented manufacturing companies, ultimately hindering the growth of Germany's economy.
The global economy is projected to grow by only 2.9% in both 2025 and 2026, down from 3.3% in 2018. The announced tariffs by Trump have troubled financial markets and increased economic uncertainty. The OECD predicts the U.S. economy will grow by 1.6% this year and 1.5% in 2026, assuming that the tariffs imposed in mid-May remain in place.
Trade barriers and associated uncertainties have significantly increased in recent months, slowing down economic growth worldwide, according to OECD Chief Economist Álvaro Pereira.
In spite of these challenges, economists anticipate a slight uptick in Germany's economy next year, with growth of 1.2% instead of the previously forecast 1.1%. They attribute this improvement to the end of internal political uncertainty, the government’s expected investment offensive, and an increase in consumption. However, these figures must be analyzed with caution as they may vary significantly due to the outcomes of various trade disputes.
Factors contributing to the slow growth of Germany’s industrial economy in recent years include heightened trade tensions, global economic uncertainty, tighter financing conditions, weak domestic investment, and policy and regulatory challenges. Potential factors for an uptick in growth include strengthening domestic demand, fiscal stimulus and infrastructure spending, recovery in business confidence, gradual easing of trade barriers, and resolving trade disputes.
| Factor | Contribution to Slow Growth (Recent Years) | Expected Impact on Recovery (Next Few Years) ||--------------------------|-------------------------------------------------|-----------------------------------------------|| Trade Tensions | High – weakens exports | Easing could boost exports || Global Uncertainty | High – limits investment | Resolution could improve confidence || Tighter Financing Conditions | High – reduces investment | Stabilization supports financing || Weak Domestic Investment | Significant – drags on industry | Recovery in sentiment needed || Policy/Regulatory Uncertainty | Moderate – delays stimulus | Fiscal spending planned for 2026 |
In the following years, Private investments in Germany are expected to increase significantly, driven by public investments in defense and infrastructure, contributing to an economic boost within the business sector. However, trade policy uncertainty, such as high tariffs, continue to dampen investments in export-oriented manufacturing companies, resulting in finance challenges for these organizations.
Easing of trade barriers and a resolution of trade disputes are potential factors for an uptick in growth within Germany's industrial economy in the next few years, as they could help to boost exports and improve business confidence. The recovery of weak domestic investment and a stabilization of tighter financing conditions are also expected to support investment and finance growth in the same period.
