• Key policy rate: 2.40% (June 2026)
• Q2 2026 GDP growth: 1%
• 2026 full-year growth target: 0.5%
• Manufacturing Purchasing Managers’ Index reading: 52.2 (July 2026)
• Inflation rate: 2.8% (July 2026)

Germany is the largest economy in Europe and the third biggest in the world, but it has been struggling to grow in recent years. Its economic output has been stagnating in recent years in the face of elevated inflation, high interest rates, and low labour productivity.  

The weaknesses of Germany’s economy are largely structural. Declining labour productivity, which was at -1 per cent in 2025 and characterized by reduced working hours and rising employee wages, has heavily weighed down Germany’s growth prospects for a post-pandemic recovery. An ageing population also highlights the urgency of welfare reform policies, but a weak political coalition under Chancellor Friedrich Merz has been impeding progress towards enactment.

The manufacturing sector, which accounts for one-fifth of total output, has languished over the past two years although monthly Purchasing Managers’ Index readings have settled above 50, indicating expansions in operations, so far into 2026. Meanwhile, the automotive sector accounts for at least 20 per cent of domestic factory output, with motor vehicles and parts accounting for over 17 per cent of total exports as of 2024. Other major export items are machinery and equipment, computer products, and chemical products. 

By expenditure, household consumption accounted for roughly half of nominal GDP while one-fifth is driven by government spending. Investments, which accounts for 20 per cent of national output, has stalled in recent years, keeping overall growth muted. The International Monetary Fund said the removal of Germany’s Constitutional debt brake allows room for greater public spending that will support economic recovery. However, an ageing population and reduced productive capacity will keep growth prospects muted.  

House view: The German economy is in dire straits and has been showing little signs of improvement in labour productivity and in attracting new investments. With no concrete economic policy reforms in sight, Lundgreen’s continues to recommend remaining underweight towards Germany and the rest of the eurozone in investment portfolios.

Updated as of 26 August 2026