German Economy Emerges from Stagnation Despite Rising Budget Deficit

The German economy shows clear signs of recovery after a prolonged period of stagnation. According to the latest data from the Federal Statistical Office (Destatis), GDP grew by 0.3% in the last quarter of 2025 compared to the previous quarter, allowing the year to close with a positive result of 0.2%. This is the first significant growth since the outbreak of the war in Ukraine, which plunged Europe's largest economy into a slowdown phase. Key drivers turned out to be public investments and growth in private consumption, although consumer sentiment remains influenced by geopolitical uncertainty. Particularly optimistic signals are coming from the construction industry, which recorded a growth trend after years of recession. The order portfolio in 2025 increased in real terms by 6.8%, and in civil and water engineering alone, record order levels were noted, mainly due to railway network modernization and digital infrastructure expansion. The DIW economic barometer rose to 101.6 points in February, exceeding the neutral threshold for the first time in nearly three years. Experts indicate that the demand impulse comes from the government's multi-billion spending on resilient infrastructure and defense. Germany has been grappling for years with strict regulations on public debt, known as the debt brake, which limit the possibilities of deficit financing of investments above 0.35% of GDP annually.However, the positive economic data are accompanied by concerning information about the state of public finances. The public sector deficit for 2025 amounted to 119.1 billion euros, representing 2.7% of GDP. This is a worse result than January estimates, which assumed a deficit of 2.4%. Although Germany still remains within the EU's three percent limit resulting from the Stability and Growth Pact, the Bundesbank warns against further debt growth. There is concern that without reforming the debt brake or drastic cuts, the deficit could reach up to 5% of GDP in the coming years, causing strong tensions within the governing coalition.