Germany's economy remains mired in stagnation, with Chancellor Friedrich Merz warning that Europe's largest economy stands at a "crossroads" and needs "radical" political and legal steps to reverse a slide that has stretched across several years. Output was broadly flat in 2025 after contracting in both 2023 and 2024, leaving the country struggling to generate momentum even as the government pours money into infrastructure and defense.
Merz, whose center-right coalition took office in May 2025, has called the outlook "very critical" and acknowledged that the measures adopted so far have not been enough to meaningfully improve performance. His government has rolled out tax relief, reform pledges and large-scale public spending, but business groups say progress is too slow to arrest the downturn.
Official forecasts capture the gap between ambition and reality. The German government's own estimate points to growth of about 0.5% in 2026, well below the European Commission's more optimistic projection of 1.2%, a figure drawn up before the latest escalation in the Middle East rattled energy markets. The European Central Bank has warned that a prolonged conflict could tip Germany into another technical recession by the end of the year.
Inflation, which eased to around 2.3% in 2025, is projected to climb again to roughly 2.9% in 2026 before receding, driven in large part by a jump in fuel prices tied to the Gulf crisis. Higher energy costs have compounded the squeeze on German manufacturers, who were already grappling with weak global demand and a sharp drop in exports to the United States amid new tariffs.
To break with decades of fiscal caution, the Bundestag last year passed a constitutional amendment exempting defense spending above 1% of GDP from borrowing limits and creating a 500-billion-euro vehicle to fund infrastructure over twelve years. The bet is that a wave of public investment can revive growth, but the payoff is expected to take time to materialize.
For now, the strain is showing in the labor market, where weak activity has stalled hiring and the unemployment rate is set to edge up toward 4% this year. Economic anxiety has overtaken migration as the public's top concern, reshaping the political mood as Merz tries to convince voters that recovery is within reach.