Germany is bracing for a difficult year in 2025, grappling with stagnating growth, fiscal uncertainty, geopolitical risks, high energy costs, and a weakening automotive sector. Without significant reforms, Europe’s largest economy risks prolonged economic malaise.

Bleak Growth Projections

Germany’s economy has seen minimal growth since late 2019, with 2025 projections among the weakest globally. Real GDP is expected to grow by only 0.3%, according to Goldman Sachs, while the Bundesbank forecasts a mere 0.2% rise. The Kiel Institute predicts outright stagnation at 0.0%.

Weak exports, sluggish private consumption, and faltering investments underpin this stagnation. Structural pressures from decarbonization, digitalization, and demographic changes have further dimmed the outlook.

“It is unclear whether the current phase of stagnation is temporary or signals a permanent and painful adjustment,” said Timo Wollmershäuser of the ifo Institute.

Political and Fiscal Uncertainty

Germany’s early federal elections in February 2025 add to the uncertainty. Investors are keenly watching whether a new government will tap into Germany’s strong fiscal capacity to stimulate growth.

Although Germany has one of the lowest debt-to-GDP ratios among advanced economies, its constitutional “debt brake” limits public borrowing. Analysts warn that without pro-growth reforms, such as tax incentives and infrastructure spending, Germany may lag behind its European neighbors.

“Fiscal policy is set to be restrictive this year and in the next two years,” the Bundesbank noted. The Kiel Institute echoed concerns, highlighting how election-related uncertainty has already dented business confidence.

Challenges in the Automotive Sector

Germany’s automotive industry, a cornerstone of its economy, faces mounting pressures. Major players like Volkswagen, BMW, and Mercedes-Benz have lost market share to U.S. and Chinese competitors, particularly in electric vehicles.

China, once Germany’s top export market, has become a rival. Disappointing growth in China and trade policy uncertainties have also weighed on German automobile exports.

“The automotive sector reflects structural changes and declining export competitiveness,” the Kiel Institute stated.

Geopolitical Risks and Trade Protectionism

Germany’s export-driven economy remains vulnerable to global protectionism, particularly anticipated trade barriers under the incoming Trump administration. Analysts warn that potential U.S. tariffs could shrink Germany’s GDP by up to 1.2%, compounding economic woes.

High Energy Costs and Inflation

Elevated energy costs continue to burden German industries. The Bundesbank reported that production in energy-intensive sectors has contracted by up to 15%. Inflation, while easing from its 2022 peak, is projected to remain above pre-pandemic levels at 2.4% in 2025.

Urgent Need for Reforms

Experts stress that Germany must enact reforms to reduce corporate tax burdens, expand infrastructure, and address labor shortages. Without these measures, structural stagnation could persist.

“The German economy is not only struggling with economic headwinds but also with structural problems,” said Bundesbank President Joachim Nagel.

As Germany navigates these challenges, its economic recovery remains uncertain, with risks overshadowing potential growth opportunities.

The UK economy recorded zero growth in the third quarter of 2024, reflecting a marked slowdown from the 0.4% growth seen in the previous quarter, according to revised figures from the Office for National Statistics (ONS). The flatlining gross domestic product (GDP) figure, which fell short of analyst expectations of 0.1%, underscores mounting economic challenges as businesses and households face heightened uncertainty.

Key Factors Behind the Stagnation

The lack of growth in the services sector, particularly in the insurance and financial industries, weighed heavily on the economy. The production sector also contracted by 0.4%, largely due to a decline in gas, electricity, air conditioning, and steam supply.

Alpesh Paleja, interim deputy chief economist at the Confederation of British Industry (CBI), attributed the stagnation to a challenging business environment. “There is little festive cheer in our latest surveys, which suggest that the economy is headed for the worst of all worlds,” Paleja said. “Firms expect to reduce both output and hiring, and price growth expectations are getting firmer.”

Businesses have voiced concerns over policy changes introduced by the Labour government following its election in July, including higher employer national insurance contributions (NICs) announced in the Autumn Budget. These measures have reportedly led many companies to reassess their budgets as the new year approaches.

Mixed Sector Performance

While exports declined by 0.5% and imports fell by 2.5%, a slight rise in net trade helped offset some losses. Construction activity showed modest improvement, though it fell short of expectations.

Household spending remained unchanged from the previous quarter at 0.5%, as consumers grew cautious with festive expenses on the horizon. Meanwhile, business investment provided a rare bright spot, rising by 1.9% compared to 1.2% in the previous quarter.

Government consumption rose at a slower pace than anticipated, further reflecting the tepid economic environment.

Outlook for 2025

Paleja called on the government to take decisive action to restore business confidence and encourage investment. “As we head into 2025, firms are looking to the government to boost confidence and give them a reason to invest,” he said, highlighting the need for reforms in areas like the apprenticeship levy, business rates, and occupational health incentives.

Geopolitical uncertainties, including the Russia-Ukraine and Israel-Palestine conflicts, along with escalating trade tensions involving China, are expected to add further pressure on businesses in 2025. Analysts warn that without significant government intervention—such as tax breaks and innovation incentives—the UK risks prolonged stagnation.

The Labour government faces increasing pressure to chart a clear industrial strategy that fosters stability and growth, providing much-needed support for both businesses and households as the economy heads into the new year.