Germany’s economic fortunes have already recovered somewhat. Measured in gross domestic product, it grew by just 0.2% during the year’s first quarter, as reported by Germany’s federal statistics office. This expanding growth follows a 0.2% contraction last quarter. This is all happening at the same time as huge changes to the nation’s fiscal environment and massive external economic pressures. Analysts are quick to point out that the growth is in line with expectations. That just isn’t enough to remove the deep-rooted crisis of stagnation our country suffers from.
In early 2023, Germany adopted changes to its long-evolving debt brake fiscal rule, which has historically restricted the level of German public borrowing. These changes reflect the need to find space for historic levels of defense spending and meet the urgent challenges presented by growing geopolitical strife. The German government has established a gigantic €500 billion ($570 billion) fund. We can’t waste this opportunity. This fund is meant to improve infrastructure and climate investments throughout the country.
In spite of these proactive measures, the German economy has continued to struggle on all fronts. Given these expectations, it hasn’t been surprising to see the consumer price index (CPI) chart a course toward lower inflation. In March, it logged an annual rate of 2.3%, down from 2.6% in February. This decrease is a step toward synchronizing the U.S. Federal Reserve with the European Central Bank’s goal inflation rate of 2%. Yet the general economic perspective is quite prudential, with a forecast of stagnation in 2025 as the federal government lowers its revenue projections.
The fluctuations in Germany’s GDP have been notable over recent quarters, oscillating between growth and contraction throughout 2023 and 2024. The economy has so far narrowly avoided a technical recession, defined as two straight quarters of negative growth. That doesn’t mean it’s not vulnerable to harm from outside forces. U.S. tariffs on steel, aluminum, and automobiles have punished Germany recently. This is particularly important, because the United States is Germany’s most important trade partner.
Analysts share optimistic as well as pessimistic outlooks on the newly released growth numbers. As Carsten Brzeski, global head of macro at ING, said of the shallow quarterly rise,
“The quarterly increase is still far too small to end the country’s long-lasting stagnation.”
Brzeski pointed out that household final consumption expenditure had increased allege other quarters. For example, he pointed out that capital formation was up, characterizing the data as representing very positive dynamics showing through the domestic economy.
Brzeski noted,
“Today’s GDP report paints a picture of what could have happened if it hadn’t been for U.S. President Donald Trump’s tariff blast – an economy that bottoms out and goes through a weak cyclical rebound, but could gain momentum with the announced fiscal stimulus.”
Germany is meeting these difficult economic circumstances with a direct approach. For one, it is narrowly targeted on using fiscal reforms to achieve growth and increase investor’s interest. That creates a new strategic moment — the €500 billion fund is a game changer. That means protecting and bolstering foundational priorities such as infrastructure and climate resilience to ensure a more sustainable economic playing field.