By David Born

Germany’s economy has seen a two-year period of decline. Key indicators for the year ahead suggest the continuation of this economic weakness. In addition to cyclical challenges, the German economy is facing deep-rooted structural issues that are contributing to a further decline in sentiment.

The German economy has experienced an extended period of subpar performance, resulting in a notable decline in overall sentiment. Following a 0.1% contraction in GDP in 2023 and a further decline of 0.2% in 2024, only modest growth is expected for 2025. Key challenges hindering growth include high energy costs, significant administrative burdens, growing global protectionist tendencies, uncertainty surrounding the economic policy direction of the new federal government, and concerns over the potential rise of political fringes.

When asked to share their business outlook for the new year, German entrepreneurs painted a concerning picture. On average, only one in eight companies anticipates "somewhat favorable" prospects. Conversely, one in three respondents expresses apprehension regarding "somewhat unfavorable" developments. These concerns are pervasive across all sectors but are particularly pronounced in the retail and construction sectors.

It was not until the summer of 2024 that incoming orders in the manufacturing sector showed signs of halting their prolonged downward trend, marking at least modest signs of recovery since June. Nevertheless, overall order volumes remain weak, impacting industrial production, which was 3.1% below the previous year’s level in November. The most affected sectors included Electrical Equipment (-5.9%) as well as the Chemicals and Pharmaceuticals industries (-4.2%). Meanwhile, energy-intensive sectors have shown signs of stabilization. While production has steadied over the course of the year, it remains at historically low levels.

Weak order volumes are impacting not only production but also capacity utilization, which has significantly declined across the majority of industrial sectors. In October 2024, capacity utilization in the manufacturing sector fell to 76.5%, a drop of 5.5 percentage points compared to October 2023. The decline was particularly pronounced in the automotive sector (-10.3 percentage points to 75.5%) and the electrical industry (-7.1 percentage points to 74.5%).

The challenges of the industrial landscape are also reflected in the labor market. In December, the number of unemployed individuals rose by approximately 170,000 compared to the same period last year, reaching a total of 2.81 million. This has led to an increase in the unemployment rate to 6.0%. The number of short-term workers also shows a clear upward trend, with a 13% increase in November 2024 compared to the previous year. At the same time, the number of job vacancies has been gradually declining. From a record high of nearly 887,000 vacancies in August 2022, demand has significantly cooled, reaching 654,000 open positions in December 2024, the lowest level since the summer of 2021.

The labor market outlook for the coming year remains bleak. According to recent surveys, for the first time, more companies (28%) plan to reduce jobs than those intending to create new positions (19%).

On the other hand, positive momentum is expected to continue due to the ongoing easing of inflation, which paves the way for further interest rate adjustments. Although inflation has slightly increased recently, we anticipate that it will average 2.0% in 2025, slightly below the 2.2% inflation rate observed in 2024.

Accompanied by the recent rise in real wages, which are expected to continue, private consumption is likely to gain momentum in 2025, contributing more substantially to economic growth than in the previous year.

While declining inflation and expected interest rate cuts may provide some relief, the likelihood of a significant economic recovery remains low, given rising protectionism, persistently high energy prices, and a weak business outlook. The Roland Berger Institute therefore forecasts a modest GDP growth of just 0.4% for 2025, placing Germany behind other G20 nations.