Germany's economy achieves growth for the first time in three years in 2025. Can the surge in government spending reverse the decline?

Driven by a surge in government spending, the German economy achieved its first annual growth in 2025 since 2022, finally breaking free from a long period of industrial decline. Data released by the German Federal Statistical Office (Destatis) on Thursday showed that after two consecutive years of contraction, the country's Gross Domestic Product (GDP) grew by 0.2% in 2025, in line with analysts' expectations. The fourth quarter GDP also recorded the same growth rate. The statistical office pointed out that last year's economic growth was mainly driven by household consumption and government spending, while investments declined and trade weighed down the economic growth. In recent years, Europe's largest economy, Germany, has been hit hard by energy crises, restricted supply chains for key inputs, and the impact of global trade by Trump, with its industrial heartland suffering particularly severe blows. Despite market optimism about Chancellor Merz's plans to invest billions of euros to strengthen military power and upgrade aging infrastructure to stimulate economic recovery, the sustainability of any economic turnaround remains uncertain. "At least at the beginning of the year, we finally see a glimmer of hope of hitting rock bottom," said Helena Meernikov, general manager of the Federation of German Industries, in an email statement. "However, to achieve a real economic upturn, we still have a long way to go." The data from Thursday showed that Germany's manufacturing sector has been weak for the third consecutive year in 2025, with output shrinking by 1.3%. The construction sector experienced an even longer downturn, with a decrease of 3.6%. Meanwhile, the upward trend in the labor market that lasted for many years abruptly halted, with a significant reduction in factory employment. Economists predict that government spending in the coming years will drive economic growth to exceed 1%. But they emphasize that further reforms must accompany the surge in spending to support demand. Economist Martin Admer said, "The statistical department has confirmed a slight growth in GDP in 2025 after two consecutive years of contraction. The outlook for this year is brighter, with a significant increase in fiscal spending expected to support economic growth to reach 0.8%. However, weak business confidence suggests a lackluster start to 2026. There are downside risks, with the scale of fiscal stimulus possibly smaller than expected and the transmission speed to the economy slower than expected." Merz is aware of the challenges ahead and has pledged to revitalize economic growth as a top priority. In a letter to members of the ruling coalition, he described certain industries as being in a "very critical" state. Recently, Volkswagen and BMW both reported a sharp drop in sales in the US and China, with the impact of US tariffs and competition from Asian automakers such as BYD Company Limited. Despite internal trade within the EU being a "stable anchor," exports to the US fell by almost 8%, with motor vehicles and parts being particularly affected. Sales to China experienced an even greater decline. "This clearly indicates that China is becoming more of a competitor to the German industry, rather than the buyer of German industrial products," the statistical office commented. It is expected that by the end of this decade, the German automotive industry will shed around 100,000 jobs. Labor Office director Andrea Nales warned that the outlook for the unemployed is dimmer than ever before. This sense of frustration is fueling support for populist parties and bolstering the influence of extremists. Less than a year after the last national election, the right-wing Alternative for Germany (AfD) is leading in some opinion polls. Meanwhile, a recent arson attack by radical groups in Berlin has highlighted the vulnerability of Germany's infrastructure due to years of underinvestment. The blackout caused by this attack left 50,000 households and 2,000 businesses without power for several days. Just the municipal towns are facing a record backlog of over 215 billion euros in investments, with roads accounting for about a quarter of it. Recent data suggests that Germany may indeed be experiencing the beginnings of a recovery. Factory orders and industrial production both saw significant growth in the available data for October and November. Defense contracts drove this growth and prompted arms manufacturer Rheinmetall AG to raise its annual performance outlook.