This year began with renewed optimism that Germany might finally emerge from its longest period of economic stagnation since the second world war. In February, Friedrich Merz, leader of the centre-right Christian Democratic Union, won federal elections after campaigning on a pledge to revitalise Europe’s largest economy. His coalition with the centre-left Social Democratic party promised a more functional government than the fractious one it replaced. In March, Germany’s parliament approved plans to ease the constitutionally enshrined “debt brake”, allowing the government to establish a €500bn fund to rebuild infrastructure and increase defence spending. Several months on, however, the early hope of rapid economic renewal is beginning to fade.
Third-quarter GDP figures on Thursday are widely expected to confirm that Germany’s economy remains sluggish. After shrinking in the past two years, the IMF expects the country to eke out 0.2 per cent growth this year — the slowest rate among major advanced economies. Unemployment has inched up since January to nearly 3mn, its highest level in 14 years. In August, industrial production fell back to 2005 levels. Business leaders are growing impatient and increasingly doubt Merz’s ability to deliver meaningful, pro-growth reforms.
To be fair, the chancellor only took office in May and the 2025 budget — setting out the government’s spending plans — was approved just last month. In the meantime, the mere promise of fiscal stimulus has buoyed the German stock market and lifted medium-term growth forecasts, even as global economic conditions have worsened. While some projects are ready to launch, it takes time to identify worthwhile infrastructure investments and begin construction.