The causes behind Germany’s longest economic stagnation since World War II have been thoroughly analysed and discussed. The combination of cyclical headwinds and structural changes and challenges has put the economy into a state of what appears to be an apparently never-ending paralysis.
Since this story is well known, today’s German GDP data offers two fresh takeaways: when debating ‘zero growth,’ consider the industrial workers who lost their jobs and the strain years of stagnation place on social security systems. The other implication is that traditional leading indicators should be taken with an even bigger pinch of salt. As the PMI composite has been above the 50-mark since the summer, it’s clear that the old rule of thumb that a PMI above 50 signals economic expansion no longer holds.
Looking ahead, it would be great to see the words “stuck”, “in” and “stagnation” disappear from the German economic dictionary for a while. Unfortunately, the very short-term outlook isn’t promising. Just think of tariffs, the stronger exchange rate, as well as political tensions and uncertainty. A combination that is still likely to hold back investments and consumption. This is why we expect the economy to remain in stagnation in the final quarter of the year.
Beyond the current quarter, conditions should finally improve for the economy – though structural issues will remain. With the German parliament expected to approve the 2026 budget this week, this year’s public underinvestment combined with next year’s full-scale fiscal stimulus should be enough to get a new spelling of the word stagnation next year.
