By Ed Frankl
Europe's largest economy showed signs of recovery last year after almost a decade in stagnation, but declining exports, intense competition from China and ensuring Berlin's massive stimulus funds are effectively deployed remain challenges to sustained growth.
Gross domestic product in the eurozone's largest member increased 0.2% in 2025, German statistics agency Destatis said Thursday, a turnaround after the economy contracted 0.9% and 0.5% in 2023 and 2024, respectively. Growth was also at 0.2% in the fourth quarter, according to an early estimate by Destatis.
Annual GDP growth averaged 1.1% in the 2010s thanks to its export-oriented economic model as globalization continued apace, an eye-catching performance at a time when other nations in the eurozone struggled to recover from the financial crash or the ensuing euro debt crisis.
But leading into the pandemic, Germany's industrial base started to creak as car production slowed down and government investment stalled under former Chancellor Angela Merkel.
Industrial weakness accelerated as energy prices skyrocketed after Russia's full-scale invasion of Ukraine, automakers shifted away from combustion engines and competition from Chinese manufacturers intensified.
Exports of goods tumbled 0.7% in 2025, driven by lower vehicle and chemicals exports, Destatis said. By contrast, imports rose by 3.6% after two years of decline.
"Germany's export business faced strong headwinds owing to higher U.S. tariffs, the appreciation of the euro and increased competition from China," Destatis President Ruth Brand said. Manufacturing output was down for a third year in a row in 2025.
Mired in a manufacturing recession, Friedrich Merz's center-right led government changed course on fiscal rigidity early last year, in part as a reaction against the threat of a pullback in U.S. military support under President Trump. Berlin pledged to unlock more than $1 trillion in defense and infrastructure projects.
"The stimulus is starting to work," said Holger Schmieding, chief economist at Hamburg-based bank Berenberg. Factory orders and industrial production rose for three straight months into November for the first time since 2022, driven by defense spending.
"That momentum should really pick up now over the course of this year," Robin Winkler, chief German economist at Deutsche Bank, said, even if the increase in GDP last year didn't mean the start of a sustained recovery yet.
While there will be a lag between orders and money being spent, big players such as defense groups continue to ramp up capacity, he said.
Germany's revival is good news for the eurozone as a whole. Industrial production in the currency area grew more than expected in November, according to data also published Thursday by the European Union's statistics agency.
Still, with mounting geopolitical challenges including U.S. tariffs and a stronger euro currency, the economy will rely more on Germany's domestic market than its traditional export model.
"There will be a strong split among sectors and companies depending on the extent to which they rely on domestic versus external demand," Winkler added.
Investors in German stocks are feeling confident. Frankfurt's blue-chip DAX index gained more than 25% in the last 12 months, and shares in defense groups like Rheinmetall have soared on the back of the planned defense spending. The DAX hit a new record amid an 11-day positive streak in the lead-up to the GDP data this week. Germany's central bank, the Bundesbank, forecasts 0.6% GDP growth this year and 1.3% in 2027.
But not all sectors are delivering. Germany's carmakers continue to face stiff competition from cheaper Chinese manufacturers and have been struggling to convince customers to switch to electric vehicles in recent years. Car-parts suppliers Bosch and Schaeffler, alongside industrial conglomerates like Thyssenkrupp, have announced thousands of layoffs in recent months. Bankruptcies climbed to a more-than-a-decade high in 2025.
And Germany, like the eurozone as a whole, still lags well behind the speed of U.S. economic growth in recent years. U.S. GDP grew at an annualized pace of 4.3% in the third quarter of 2025.
Lawmakers have made some progress in cutting red tape and reforming planning laws in a bid to foster growth. Critical infrastructure projects can be fast-tracked in the same way LNG terminals were in 2022 after the war in Ukraine began, Berenberg's Schmieding noted.
"The perception is often that Europe is just well behind. It's a bit too negative, and especially on Germany," he said.
Proponents of a more positive case for the economy may take heart from echoes of West Germany at the start of the 1980s. Then, too, there was a change of government at a time Asian nations were picking up steam, as manufacturers left failing heavy industries behind and pivoted to sectors that became success stories in the 1990s--electrical engineering, machine tools and cars.
"You had three or four years of what looked like deindustrialization, when industrial production declined or stagnated," Winkler said. GDP growth averaged 2.6% annually in the decade up to reunification.
"So I think it's a pretty good parallel ... And I like it because it has a happy ending," he added.
Write to Ed Frankl at edward.frankl@wsj.com
(END) Dow Jones Newswires
01-15-26 0535ET
