Germany’s economy has been showing signs of stagnation since last year. At the end of 2025, Germany only marked a growth of 0.2 per cent despite Chancellor Friedrich Merz’s ‘Made for Germany’ investment offensive, which is intended to get the German economy back on track. Economic forecasts for Germany are being revised downward, with its GDP expected to grow by only one per cent in 2026.
It appears that the economy has been severely affected by intense competition from China, as industries that were traditionally ‘Made in Germany’, such as cars, robots, and high-quality household appliances, are increasingly being taken over by Chinese firms. Due to $230 billion in Chinese government subsidies for its car industry, China has claimed the tightly held title of the largest car exporter, with Germany only in fourth place, behind Japan and Mexico.
Since last year, German companies have also been burdened by US tariffs. Declining exports, especially to the USA, and a sluggish economy are prompting worries about structural decline, especially as industrial production has declined for the fourth year in a row, leaving many small and medium-sized enterprises disappointed and frustrated.
Germany is also losing momentum in climate protection, as greenhouse gas emissions fell less sharply in 2025 than in previous years despite the expansion of solar energy. CO2 emissions particularly increased in transport and buildings. A warning sign is that Germany’s economic downturn in energy-intensive industries led to lower CO2 emissions. This raises concerns as these are not sustainable, structural reductions in emissions. For the German economy, there is an urgent need for investment in modernisation and climate-neutral production.
The German economy is not picking up momentum, and the profound changes in industry continue to affect the labour market. The number of unemployed has been rising steadily for over three years, reaching 6.2 per cent in December. The latest figures show no sign of improvement at the beginning of the year. Last year, job cuts mainly affected those employed in traditional industrial sectors, particularly the automotive industry, with major car brands and their suppliers’ cutting jobs, resulting in around 140,000 job losses in the industry. Hopes are now high that investment programmes in infrastructure and defence will create jobs in industry and construction in 2026.
In 2025, the number of insolvent companies in Germany reached its highest level in more than ten years. Over the course of the year, 23,900 companies filed for insolvency, with micro-enterprises accounting for the largest share of corporate insolvencies. Heavy indebtedness, difficulties in obtaining new loans and structural burdens such as energy prices and regulation are especially putting small and medium-sized enterprises under enormous pressure. Concerns remain that the ongoing economic downturn, high costs, and bureaucracy will continue to drive insolvencies.
Despite these challenges, start-ups seem to boom in the shadow of the crisis. Last year, more start-ups were founded in Germany than ever before, marking a record 3,568 new start-ups in 2025. The number of start-ups was 29 per cent higher than in the previous year, and the trend is expected to continue in the current year. With more than a quarter of the start-ups founded using AI as an important part of their business model, AI is considered the key driver of this unprecedented start-up boom. For Germany, this offers a glimmer of hope for its reputation as an attractive business location for entrepreneurs and companies of the future.
Overall, it seems that the German business model, which is based on a strong industry and its exports, is currently facing increasing pressure, particularly due to US tariffs and Chinese competition. Chancellor Merz is preparing the coalition for a difficult year in 2026. He warns that the economic situation must be given top priority, acknowledging that it is very critical in some sectors. Solving the problem of high labour and energy costs, as well as bureaucratic and tax burdens, is on the agenda, with the aim of strengthening trust in politics and social cohesion.
However, the ruling parties remain divided on fiscal policy. While the CDU/CSU could envisage faster tax cuts for companies than stated in the coalition agreement, the SPD is sceptical. Social Democrats argue that flat-rate tax reductions do little to stimulate the economy and instead resemble a scattergun approach to subsidies, favouring targeted measures, such as higher inheritance taxes.
Time will tell whether Chancellor Merz’s political and economic agenda will deliver a turnaround this year. With five state elections scheduled for 2026, Germany’s political balance could shift significantly, as polls show the far-right Alternative for Germany (AfD) gaining ground while governing parties lose support. What is already clear, however, is that renewed growth is likely to come at a cost: higher public debt through government investment, alongside an economically liberal reform course that prioritises competitiveness while placing pressure on the welfare state.
