As in other Eurozone economies, inflationary pressures in Germany are gradually easing, particularly in the energy and food sectors, despite short-term volatility. In 2024, inflation stood at +2.3%, approaching the ECB’s target. In 2025, inflation slowed slightly to 2.2%, primarily due to sticky price pressures in the services sector, which remained between 3% and 4%, and a rebound in food prices. From 2026 onwards, inflation is expected to fall further, reaching +2.1%. This decline is supported by the delayed effects of monetary easing and easing labour cost pressures. However, this trend will reverse in 2027 when the full effects of fiscal stimulus are felt in a weak but already strained labour market and capacity constraints in the construction sector with inflation increasing again to +2.2%. Wage growth, a critical factor for the labour-intensive services sector, surged to +6.1% in 2023 and remained high at +5.1% in 2024. In 2025, wage growth remained high at +5%, due to the catch-up effects on household purchasing power from the period of high inflation, and is forecast to slow to +2.7% in 2026. Upward pressure on wages will persist throughout 2027, with an expected increase of +3%, driven by increased labour demand, particularly from public investment initiatives linked to the national infrastructure fund.

Despite multiple crises, Germany remains committed to fiscal discipline. In 2023, the general government deficit stood at -2.1% of GDP, while the debt-to-GDP ratio was near 62.3%, with expectations for further decline under the debt brake. However, a federal court ruling in late 2023 forced the government to implement spending cuts and reallocate resources. These tensions culminated in the collapse of the governing coalition in November 2024, following disagreements over how to close the 2025 budget gap and broader economic policy. The government deficit came in at -2.4% in 2024 and debt-to-GDP ratio stood at 62.2% of GDP. The new government reached an agreement on the 2025 and the 2026 budgets, which focus on defense, infrastructure and climate. While core expenditures as well as net borrowing will increase, much of it kept outside the core budget, masking fiscal constraints. At the same time, fiscal pressure will increase due to geopolitical tensions, an ageing population and increasing investment requirements. Despite the announcement of the significant fiscal stimulus, spending is pick up only gradually due to capacity constraints and approval procedures. This will lead to wider projected fiscal deficits of -4.0% in 2026 and -3.9% in 2027. The debt-to-GDP ratio is expected to rise slightly to 65.5% in 2026 and 66.9% in 2027.

Germany offers a dynamic business environment, underpinned by a strong industrial base and a highly skilled workforce. Renowned for its stability and commitment to sustainability, the country faces challenges such as regulatory complexities and rising energy costs that necessitate adaptation and innovation for businesses to stay competitive. Additionally, uneven performance across different sectors and regulatory areas presents obstacles. In response, new initiatives are being implemented to enhance regulatory frameworks, making them more conducive to competition while reducing administrative burdens. The current initiatives aimed at reducing bureaucracy further enhance a vibrant business landscape.

Following the collapse of the German three-party coalition, snap elections were set for February 2025. The county is on its way to a more stable and functional government, with a grand coalition between the CDU/CSU and the SPD and with the election of Friedrich Merz as chancellor and swearing in of the cabinet members in May 2025. But the coalition is a mixed bag, without the sweeping new beginnings that many had hoped for. On the positive side, the coalition focuses on pro-business reforms, including a 30% super depreciation allowance for three years, lower corporate taxes from 2028 and the abolition of the Supply Chain Act. However, the announced autumn of reforms lacked key structural reforms, particularly in the areas of pensions, work incentives and social security. The coalition's divergent views on the economy make real economic rebalancing and improved competitiveness unlikely without a shift in priorities.