Germany’s Economy Shows Signs of Life With Surprise Q4 Growth, Fueling Hopes for 2026 Rebound

Background Turbulence

Of course, in this post-pandemic ‘new world’, nothing can be taken for granted, and the cyclical recovery may run into problems. “It is true that the strength of the euro, the delayed impact of US tariffs and the possibility of new tariffs could continue to tarnish the cyclical recovery,” admits Brzeski.

Despite the incoming data, skepticism about the major stimulus package persists. “It is clear that the German economy has emerged from recession. But the crisis is not over yet. The recent weakness in the Ifo business climate indicates low growth for the first quarter. It is unlikely that the broad fiscal package of the German government will succeed, as the vast majority of companies do not believe in the long-awaited revival of economic policy,” argues Krämer from Commerzbank.

The federal government is providing aid to companies and citizens this year amounting to an estimated 0.8% of GDP. However, Krämer explains, companies are unlikely to channel all this money into increased investment, as they do not believe business conditions in Germany will improve significantly. For instance, he points out that 79% of companies surveyed by the German Association of Small and Medium-sized Businesses see no effort by the federal government to address issues relevant to them. “Almost 64% do not believe that the government can create the necessary political conditions for an economic recovery,” he concludes.

But the major underlying issue remains the well-known structural challenges. A lack of investment and reform in the 2010s, along with China’s rise from an export destination to a systemic rival, have pushed the economy into this de facto stagnation. The export-oriented business model has come under severe pressure. “Although a cyclical improvement is currently brewing, driven by fiscal stimulus, structural reforms and more investment are needed to improve potential growth,” insists the ING economist.

Solving these problems quickly is impossible, the analyst laments. “This is a completely different challenge than about 20 years ago, when Germany was the ‘sick man of Europe’. The economy still needs an almost complete transformation, from well-known measures such as reducing bureaucracy and introducing e-government, to addressing the financial burden of demographic change or providing relief through tax cuts. It is up to German Chancellor Friedrich Merz and his government to implement these reforms this year and turn the long-awaited upturn into a sustainable recovery.”

While Germany can do little to prevent new external crises, the expert finishes, it has total and absolute control to avoid swinging from one extreme to the other: “The biggest domestic risk remains any sudden shift from national depression to complacency.”