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Germany

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Germany

  • Key policy rate: 2.65% (March 2025)
  • 2024 Quarterly GDP growth: -0.2%
  • 2025 GDP growth forecast: 0.3%
  • Manufacturing Purchasing Managers’ Index reading: 46.5 (February 2025)
  • Inflation rate: 2.3% (February 2025)
Germany is the largest economy in Europe and the third biggest in the world but has been struggling to grow in recent years. The economy headed for a second straight year of recession in 2024 in the face of elevated inflation and high interest rates. The weaknesses of Germany’s economy are largely structural. Declining labour productivity, which was at -1 per cent in 2023 and characterized by reduced working hours and rising employee wages, has heavily weighed down Germany’s growth prospects towards post-pandemic recovery. This is likely to be sustained as the country began testing a four-day workweek in early 2024, in part an attempt to attract more Germans to re-enter the workforce. The manufacturing sector, which accounts for one-fourth of total output, has languished over the past two years, with monthly Purchasing Managers’ Index readings staying far below the neutral threshold of 50 since July 2022. Meanwhile, the automotive sector accounts for at least 20 per cent of domestic factory output, with motor vehicles and parts accounting for over 15 per cent of total exports as of 2022. Other major export items are machinery and equipment, chemical products, and computer products. By expenditure, household consumption accounted for roughly half of nominal GDP while one-fifth is driven by government spending. The International Monetary Fund said Germany has room to increase public spending as it actively managed its debt burden unlike its peers. Meanwhile, gross capital formation has declined year-on-year in 2023, suggesting a slowdown in investments in the domestic economy.
House view: The German economy is in dire straits and is showing little signs of improvement. With no concrete economic policy reforms in sight, Lundgreen’s continue to recommend remaining underweight towards Germany and the rest of the eurozone in investment portfolios. Updated as of 7 March 2025