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German Economic Recovery to Begin Slowly, Says Bundesbank

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Germany’s economic recovery after three years of stagnation is expected to begin slowly next year before gaining momentum later, according to the Bundesbank’s latest biannual economic projections. Europe’s largest economy has struggled since 2023 due to a weakened industrial sector, subdued consumer spending and restrained government expenditure. A turnaround began this year after Chancellor Friedrich Merz eased spending rules and announced higher outlays on defence and infrastructure.

Bundesbank President Joachim Nagel said growth would remain modest at first but strengthen from the second quarter of 2026, supported by increased government spending and a revival in exports. The central bank now forecasts economic growth of 0.2% in 2025, an improvement from its earlier expectation of stagnation, while growth in 2026 is projected at 0.6%, slightly below its previous estimate.

Inflation projections, however, have been revised sharply higher due to faster-than-expected wage growth. The Bundesbank warned that strong wage increases, driven by low unemployment and labour shortages, could persist for years. Consumer price inflation is now expected to reach 2.2% in 2025, up from an earlier forecast of 1.5%, influencing the European Central Bank’s decision to raise its own euro zone inflation outlook and maintain a cautious policy stance.

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Germany falls into recession as inflation hits economy

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Germany has entered into a recession in the first quarter of the year due to persistent inflation, according to updated growth data. The country’s economy contracted by 0.3% between January and March, following a 0.5% contraction in the previous three months.

The halt in Russian gas supplies after the invasion of Ukraine also had a significant impact on Germany. High inflation, with an April rate of 7.2%, has led to reduced household spending on various goods and weaker industrial orders. The revised figures indicated declines in household and government spending, as well as a drop in car sales after the reduction of government grants for electric and hybrid vehicles. Private sector investment and exports showed some improvement but were insufficient to prevent Germany from entering a recession.

Although the recession was less severe than expected, analysts predict weak economic performance to continue in the second quarter of 2023. The Bundesbank anticipates modest growth in the April to June quarter, driven by an industry rebound offsetting stagnant consumer spending.

The International Monetary Fund (IMF) projects Germany to be the weakest among advanced economies, with a predicted contraction of 0.1% this year, while upgrading its forecast for the UK to a growth of 0.4%.

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