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Germany is one of the European Union (EU) economies that are monitored by economists coming from all over the world. It is no secret that the German economy has been under pressure for quite some time, with the clash in Ukraine having a special impact on its output due to higher energy prices.

As Germany is without a doubt one of the largest economies in terms of output among the European bloc of countries, its future is a topic of conversation in the finance industry. By reading this article you will get some information that could be useful when building your trading and investment plans.
 

German Economy Struggles

The German economy is expected to return to 0.3% growth after two years of recession recorded in 2023 and 2024, however 0.5% less than previous forecasts. Ifo analysts noted that “Germany is going through by far the longest phase of stagnation in post-war history. It is also falling behind considerably in an international comparison."

The country's finance minister, Jörg Kukies, told CNBC that structural weaknesses would have to be addressed, acknowledging the economy’s inability to compete with other major economies across the world. The minister also referred to the so-called debt brake that limits how much debt the government can take on and dictates that the size of the federal government's budget deficit must not exceed 0.35% of the country's annual gross domestic product. Kukies mentioned that there is going to be an increased demand for investments related to the public sector saying “we have so much need for infrastructure spend for railways, on roads, on bridges, on education, on 5G, 6G infrastructure etc. So, that's the problem that we have to fix. We just need to offer them better conditions to invest and do research and development in Germany.”

A factor that could play a significant role in Germany’s economic comeback or not will be the snap elections on February 23rd. The former three-party governing coalition, which collapsed in November, is being held responsible for the financial crisis as it has allegedly failed to generate growth and deal with high energy costs that act as headwinds for the economy.
 

Germany Business Climate Improving But Not As Much As Wanted

The latest survey presented by the Ifo showed that the Institute's business climate in Germany rose to 85.1 in January, from 84.7 in December, on the back of more positive assessment of the current situation. Nevertheless, business owners still feel pessimistic regarding the future.

Although the increased figure could mean that optimism could prevail in the next few months, economist at the Dutch ING bank noted: “The slight increase in Germany's most prominent leading indicator does not yet signal an imminent economic rebound. Instead, the economy remains stuck in stagnation with more downside than upside risks in the short term. It’s obvious that the results of the US elections and policy uncertainty in Germany ahead of the upcoming elections are still weighing on sentiment.”
 

German Companies Urge For Reforms

The Federation of German Industries (BDI) which is an umbrella organization of German industry and other services providers, said that the German economy is in deep crisis, with gross domestic product likely to contract 0.1% in 2025. BDI analysts noted that this would put it on track for three years of declining growth for the first time since 1989, the year of reunification.

The BDI’s head, Peter Leibinger, stressed the urgent need for changes in the German economy. Leibinger noted: “The situation is very serious: Growth in industry in particular has suffered a structural break. Order books remain empty, machines are standing still, companies are no longer investing—or at least not in Germany. Public investment in modern infrastructure, in the transformation and the resilience of our economy, is urgently needed. The most important thing will be to enter into a transactional relationship and to have strategically important competencies that our partner can only find with us.“
 

German Economy Slides, DAX Rises

Although the German economy faces several issues, the stock market seems to be weathering the storm. The DAX40 stock index, which is made up of 40 large publicly traded German companies, hit a record high on January 23rd, despite the grim financial reports. Some of you will be wondering why this happens as an economy that barely grows should have been accompanied by a degrading stock market.

Source: TradingView - Past performance is not a reliable indicator of future results.

However, this is not the case here. Economists suggest that the reason behind the DAX capability to withstand the effect is a potential “inverse correlation between economic performance and stock market performance. The revenues for these companies aren't in Germany. So, the German economy doesn't matter."

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