Market Update: Economic Key Facts Germany – KPMG in Germany – Full Analysis

Next year, the German economy is expected to grow noticeably again for the first time since 2022. However, the potential would be significantly greater if the federal government were to use the billions in new debt in a more targeted manner. These are the key findings of the annual report submitted to the government by the German Council of Economic Experts. The five council members, commonly known as the “economic wise men,” warn against squandering opportunities for more growth.

According to their forecast, real gross domestic product will rise by +0.9% in 2026, after growing by only +0.2% this year. This would mean that the German economy would leave the phase of recession and stagnation behind. Economic output declined in 2023 and 2024.

A significant portion of the expected growth is attributable to additional government spending from the special fund for infrastructure, climate neutrality, and defense. According to calculations, these funds contribute around 0.3 percentage points to the forecast increase of +0.9%. A further 0.3 percentage points will come from the higher number of working days in 2026. Only about one-third of the growth will come from original activity in the private sector.

The mood among companies in Germany has deteriorated. The ifo Business Climate Index fell to 88.1 points in November 2025, down from 88.4 points in October. This was due to poorer expectations for the coming months. The current business situation, on the other hand, was assessed somewhat more positively.

The public expenditure ratio, which indicates the state’s influence on an economy, is calculated as total government expenditure as a percentage of GDP. According to the International Monetary Fund (IMF), this amounted to 49.5% in Germany in 2024, which was above the average for the G7 countries of 46.1% and the public spending ratio of other major economies such as the United Kingdom (44.0%), the United States (37.6%), and China (32.9%).

According to the OECD, the share of taxes and social security contributions in total labor costs for average earners in Germany was 47.9% in 2024 for singles without children. This puts Germany in second-worst place among the 38 OECD member states after Belgium and well above the OECD average of 34.9%, which detracts from Germany’s attractiveness as an investment location. The rate is also significantly lower in countries outside the EU, such as the United Kingdom (29.4%) and the United States (30.1%).

The latest forecasts by German economic research institutes and government organizations for GDP growth in Germany range between +/-0.0% and +0.3% for the 2025 calendar year and between +0.7% and +1.7% for the 2026 calendar year.