Economy in Germany: How bad is it now?

1 Crisis, crisis, Germany is in a crisis, it is said again and again. And the lobbyists warn that the federal government must push through its reforms if the economy is not to be left behind. How bad is it really?

In fact, the German economy has not grown noticeably for a long time. It has not yet been able to compensate for the slumps during the corona pandemic and the energy price crisis; it even shrank at times. If economic output had grown since 2020 as it did in the previous ten years, it would now be 11 percent higher. For an average household in Germany, this means an annual loss of income of around 12,000 euros, calculates economist Tom Krebs in his recently published book “Capital and Crisis”. But recently the mood among economic experts seems to have brightened at least somewhat.

“The situation is better than the public discussion suggests,” says Sebastian Dullien, director of the Institute for Macroeconomics and Business Cycle Research (IMK). He published a new forecast a few days ago. He assumes economic growth of 1.3 percent this year and 1.4 percent next year. For comparison: In June, the IMK only expected the German economy to grow by 0.6 or 0.9 percent. Other economists have raised their forecasts to a similar extent.

2 With the special fund for infrastructure and the billions for the military, the federal government is channeling huge resources into the economy. Isn't that just an upswing on credit?

Of course, the state also ensures an upswing when it invests in roads and the like. In doing so, he renews the infrastructure and brings money into the economic cycle. The billions for the military also largely flow into German companies. However, according to the experts, increased government spending is not the reason for the better mood. First of all, it is due to a boring statistical effect: the Federal Statistical Office revised its data. The recession in 2024 was easier than previously assumed. The revision also gave economists a more positive picture of economic developments.

Above all, however, the export sector surprised positively. Local companies were able to sell goods worth 817.8 billion euros abroad in the first half of 2026. That's an increase of 3.9 percent. “Made in Germany” was particularly in demand in other European countries. This made up for the fact that the economy is still struggling with US tariffs and growing competition from China.

3 Are there also risks to the upswing?

The biggest risk right now is the war in the Middle East. Because it drives up energy prices. “We will have higher inflation than previously thought,” says Dullien. Initially, he and his colleagues had assumed that the Iran War would end quickly. But that apparently doesn't happen. The result: energy prices are rising again. In the last few days, prices at the pumps have risen again to record levels. This not only puts a direct burden on companies and consumers. The European Central Bank (ECB) could also raise interest rates again in the fight against inflation. She has done this twice since the start of the Iran War. Two to three more interest rate hikes could follow, making loans more expensive for companies, consumers and the public sector.

4 Volkswagen wants to cut jobs, other German car manufacturers also want to save money. Isn't German industry in a serious crisis?

The crisis in the German economy is primarily an industrial crisis. And the automotive industry is their most important industry. In this respect, it is also a problem for the entire economy when a company like VW is in crisis and was able to sell around 280,000 fewer cars in the first half of the year alone than the year before. Because the car manufacturer crisis is having an impact on the labor market. In the first half of the year, the number of employees in the industry fell by 5.8 percent to 691,500 people. This is the lowest level since 2005. A total of 144,100 jobs were lost in the manufacturing sector in the first half of 2026.

But there are also bright spots: On the one hand, the electric vehicle business is finally getting started among German car manufacturers. On the other hand, there are also branches where the mood is quite good. And not just in the defense industry, which currently benefits from government contracts. On the occasion of the upcoming collective bargaining round in the metal and electrical industries, IG Metall conducted a survey. It gave a very differentiated picture of the situation in Germany's most important industrial sector, with around 3.7 million employees. According to this, one in five respondents stated that the economic situation of their own employer was bad or very bad. However, half describe the situation in the company as good or very good.

5 In which German industrial sectors are things doing better?

Employees rated the situation in aerospace, armaments, shipbuilding, medical technology and energy production companies as particularly positive. In addition, local companies were apparently able to benefit from the AI ​​boom in the USA. The laser specialist Trumpf, for example, has become an important supplier to the chip industry. The DAX group Siemens Energy also benefits from the construction of new data centers. Because these are driving up electricity demand in the USA, his business with gas turbines is currently booming.

6 Should the federal government actually go through with the announced social reforms if the economy isn't going that badly?

Before the summer break, the federal government announced extensive reforms of the welfare state, such as the abolition of the so-called pension at 63 and cuts to statutory health and nursing care insurance. The business associations are demanding that these reforms be implemented now. But economist Dullien warns: “The welfare state debate is not conducive to economic recovery.” He refers to a survey that his institute carried out. According to this, 42 percent of those surveyed are already limiting their consumption because they are worried about their financial security because of the welfare state debate. And this consumer restraint is in turn putting pressure on the economy.

7 What would be the alternative to social reforms?

Sebastian Dullien says: “Germany has no classic problems with price competitiveness.” That's why it's no use if employees work longer hours for the same salary, as some employers are currently demanding. Instead, the current problems are the consequences of external shocks - in energy prices and through protectionism in China and the USA. “That’s why a more decisive industrial policy is needed instead of wage cost reductions,” says Dullien. Within this framework, the European markets must be better protected against unfair competition. For example, through protective tariffs or through targeted support for certain industries.