When Europe’s largest economy stops growing, that means the whole region is in trouble.
And Germany’s economy is currently facing a big growth problem.
Factories are shrinking, welfare costs are rising, and the political system is struggling to respond.
The same warning signs appear in reports from industry groups, economists and government advisers.
They point to a deeper shift that is not caused by one crisis but by several long-running pressures moving at the same time.
Germany’s economic growth story
Since 2019, Germany’s economy has only grown by 1%, while the US economy grew by 12%, and the average EU country’s growth was 4% over the period.
These differences indicate something deeper than pandemic effects or energy prices.
They show that Germany’s underlying engines are not producing the output they once did.
Forecasts for 2026 point to 0.9% growth, although a third of that is due to extra working days in the calendar.
Industrial production is expected to fall again next year, marking four consecutive years of contraction.
On top of that, manufacturing has been declining since 2018, and the rebound after the pandemic was much weaker than expected.
World trade is also slowing sharply, which matters because Germany still relies heavily on exports to generate growth.
Many economists now say the country has not yet found a replacement for the model that carried it through the 1990s and 2000s.
A shrinking workforce meets a rising bill
Germany’s pension system has become the centre of a political storm, but the underlying issue is demographic.
About 20 million workers are expected to retire over the next ten years, while only 12.5 million enter working age.
The worker-to-retiree ratio used to be 6:1 during Germany’s golden days, but now it’s at 2:1 and falling.
Pension spending already accounts for roughly 12% of GDP. Social spending overall sits near 31% of GDP.
The tax and contribution burden is expected to hit a record 41.5% of GDP in 2025.
Younger conservative lawmakers have begun to revolt against a pension bill that guarantees payouts to 2031 and beyond.
Their resistance is not simply ideological. They see the bill as another step toward loading future workers with rising contributions.
The chancellor is now facing a rebellion within his own party over a policy that was supposed to stabilise the system.
The political tension mirrors the economic one. Germany has an ageing society with a welfare system shaped for a different population structure.
What is happening to Germany’s industrial base
Germany’s industrial economy is under pressure from higher costs and tougher competition.
Energy-intensive sectors have struggled since the loss of cheap Russian gas.
Electricity prices remain higher than in the United States and many European neighbours, which makes investment decisions harder for companies that operate on thin margins.
Labour costs have risen faster than productivity in recent years. This reduces competitiveness even when global demand is strong.
The automotive sector illustrates this. German carmakers built their reputation on engineering and combustion technology.
The move to electric vehicles and software-centred design has changed what creates value in the industry.
Firms like Tesla and China’s BYD have expanded quickly. German producers have cut jobs and scaled back production plans.
Industry lobby groups warn that the gap could widen without rapid adaptation.
Why the growth outlook remains weak
Germany’s economy faces several headwinds at once. Exports are under strain because global trade is slowing next year.
Private investment remains weak because firms are uncertain about long-term demand and energy costs.
Government spending on defence and infrastructure is expected to rise, but large projects move slowly due to planning rules and administrative delays.
The Bundesbank expects only a slight improvement in output in the final quarter of 2025. IMF assessments warn that Germany may struggle to regain strong growth unless it undertakes more significant reforms.
Many economists point out that Germany has been underinvesting for years. Digital infrastructure, public transport networks, school facilities and energy systems need large upgrades.
These areas shape productivity, yet progress has been uneven. The Germany economy cannot rely on its old strengths if the foundations for new industries are not built now.
The investment gap that holds back new industries
Research spending in Germany is still high, but it is concentrated in legacy sectors such as mechanical engineering, chemicals and combustion engines.
These areas remain important, but they do not create the same growth potential they once did.
High-tech sectors like biotechnology, artificial intelligence and advanced computing need different skills and funding structures.
Germany’s venture capital is small compared with the United States and many late stage start ups move abroad to access deeper capital markets. Banks still dominate business lending, which supports established firms but slows the expansion of young companies that need flexible funding. This keeps productivity growth low and limits the diversity of the economic base.
A government under pressure in a tense political landscape
The coalition led by Chancellor Friedrich Merz has a very narrow majority. Internal disagreements over the pension bill have exposed how fragile the government’s position has become.
Industry groups say reforms are too slow for the scale of the challenge.
Opinion polls show the far right AfD ahead of the government in some surveys.
This adds political risk to any policy that imposes clear costs on voters.
Germany still has strong institutions and a skilled workforce, but its economy is at a turning point. The pressures that have built up over the past decade are becoming harder to ignore. The decisions taken now will shape how the Germany economy grows in the years ahead.
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