Economics Update May 2025 - Germany must now do its homework

When the new federal government takes office this week, it will be confronted with an economy that continues to stagnate: In all likelihood, economic output will not grow in the current year either. This would make 2025 the sixth year of stagnation in a row - economic output will remain at the level seen at the end of 2019, before the outbreak of the coronavirus pandemic.

German industrial production will continue to fall in 2025

The industrial sector, which is particularly important for Germany, has played a significant role in the tense situation: industrial production has been on a pronounced downward trend since the end of 2017 and is currently more than 15% below the level reached at that time. Of the larger sectors, only the pharmaceutical industry has been able to buck this trend. Vehicle construction, on the other hand, recorded losses of more than a quarter. There is no rapid improvement in sight: the tariffs threatened by US President Donald Trump are impacting the export-oriented industry in various ways: Firstly in terms of exports to the USA, which account for around 10 percent of total German exports, and secondly due to significantly increased competition with suppliers from China and other Asian countries both domestically and in export markets outside the USA. An additional negative impetus will come from the USA if the economic situation there deteriorates significantly. There are already some indications of this. German industrial production will therefore shrink by more than one percent again this year.

The coalition agreement does not send out a signal of change

However, whether things will improve in 2026 is by no means dependent on Trump alone. The fact that the crisis facing the German economy in general and industry in particular is essentially a structural crisis should be a truism by now. The solution cannot therefore come from outside, but must consist of improving the structural framework conditions in such a way that companies in Germany have good prospects of international competitiveness. Expectations of the new federal government are rightly high in this respect. One thing can be said about the coalition agreement: It has not been the great success that could have sent out a clear signal of change. This would have required the setting of clear priorities and the clear announcement of targeted measures.

The intended reduction in electricity tax with the aim of lower electricity prices, especially for industry, can be seen as a plus point. The stated intention to reduce bureaucracy, modernize the state and, above all, drive forward digitalization at least indicates an accurate diagnosis of the problem. However, in view of the fruitlessness of previous efforts, this alone is not enough to send out the aforementioned signal of a new beginning - the activities of the responsible ministers should be able to demonstrate as quickly as possible that this government really means business this time. What is really disappointing is the lack of courage on the issue of tax relief for both income earners and companies. The announcement of minimal tax cuts in a few years is clearly not enough.

Focusing on your own homework

In any case, a shift of focus in the debates on the prospects for the German economy would be desirable: it is not primarily about what ideas and measures Trump will throw into the ring next. Rather, the decisive factor is what we here in Germany (and Europe) can influence ourselves and can ultimately only implement ourselves. The good news is that there are many things that can be done. Hopes for an end to the misery and a new upturn are therefore always justified.