The German economy enters 2026 with signs of recovery, yet optimism is clouded by data on public finances. The Federal Statistical Office revised the 2025 deficit figure to 119 billion euros. Although GDP rose in the fourth quarter due to consumption, companies are still planning job cuts, and consumer sentiment remains at its lowest level since the 2008 financial crisis.

Surprising GDP Growth

The German economy recorded 0.3% growth at the end of 2025, allowing it to avoid a technical recession.

Record Budget Hole

The state deficit rose to 119 billion euros, significantly exceeding earlier government and analyst forecasts.

Consumer Pessimism

Germans' propensity to save is the highest in 18 years, hampering the potential for a trade-led recovery.

Reductions in Industry

Despite better economic conditions, more and more companies are reporting plans to cut jobs to improve their profitability.

The latest data from the Federal Statistical Office (Destatis) presents a mixed picture of the health of Europe's largest economy. Germany's GDP unexpectedly rose at the end of 2025, averting a deeper stagnation. Government spending and private consumption played a key role, although the latter rests on fragile foundations. Simultaneously, the DIW Institute published a business cycle barometer which, for the first time in nearly two years, signals above-average growth, offering hope for a sustained recovery in the coming months. At the same time, the scale of the state's fiscal problems has been revealed. The budget deficit for 2025 turned out to be significantly higher than initial estimates, amounting to 119.1 billion euros. The gap in public finances widened despite a relatively stable economy, primarily due to increased social transfers and debt servicing costs. Although the budget deficit relative to GDP remained at 2.7%, i.e., below the EU limit contained in the stability pact, the pace of debt growth is worrying economists. German fiscal policy has traditionally been based on the constitutional debt brake (Schuldenbremse), introduced in 2009 to limit the state's structural deficit to a minimum.A paradoxical situation prevails in the labor market. Despite better macroeconomic prospects, the Ifo Institute's employment barometer indicates a growing willingness among companies to reduce staff. Firms, particularly in the industrial sector, are grappling with high energy costs and geopolitical uncertainty, prompting them to optimize labor costs. Meanwhile, German citizens, concerned about the future, are showing the highest propensity to save since the global financial crisis, which directly impacts retail trade. „Die deutsche Wirtschaft zeigt Resilienz, aber eine nachhaltige Erholung braucht nicht nur Konsum, sondern vor allem mutige private Investitionen.” (The German economy shows resilience, but a sustainable recovery needs not just consumption, but above all bold private investment.) — President of the German Institute for Economic Research (DIW)119 mld € — was the public finance sector deficit in 2025The situation on the Frankfurt stock exchange, however, remains stable. The DAX index surpassed the 25,000-point barrier, driven by strong results from technology companies and positive signals from industry. Investors seem to be ignoring weak consumer sentiment data, focusing instead on the global economic improvement and anticipated results from American semiconductor giants.

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