The priority for the new German government is to establish a clear industrial strategy, modernise the nation’s energy infrastructure, and implement long overdue reforms in taxation, the pension system and the labour market. Together, these measures will boost economic competitiveness, raise the growth outlook and address growing defence and welfare spending pressures.
After five years of near stagnation, the incoming government will have to prioritise boosting economic growth through supply-side reforms, not least because US protectionism adds to the geopolitical uncertainty challenging the German export-led growth model.
A broad-based increase in US import tariffs would significantly impact Germany’s automotive, machinery and equipment manufacturing industries. Such tariffs would lead to weaker export demand, higher input costs, and shrinking profit margins as companies adjust their supply chains. In addition, even if tariffs are deferred or renegotiated, the persistent uncertainty is likely to curb investment over the coming quarters.
Scope Ratings has thus lowered its GDP forecast on Germany for 2025 to 0.1% from 0.9% to account for the likely impact of US tariffs and the collapse of Germany’s coalition government in November, which delays potential fiscal stimulus.
German GDP growth has lagged that of other major European economies (Figure 1). Since 2019, GDP expansion in Spain (+8%), Italy (+5%), France (+4%) and the UK (+3%) has outpaced that of Germany, as have growth rates in Japan (+2%) and the US (+12%). With demographic pressures mounting, Scope estimates the country’s medium-term growth potential at around 0.5-0.7%.
Figure 1: German economic growth is falling behind that of other large economies
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Germany’s weak growth outlook reflects its declining international competitiveness, dropping from 15th place in 2022 to 24th by 2024 in the IMD World Competitiveness Ranking. However, there are several ambitious reforms the next coalition government could undertake after the 23 February elections to tackle structural challenges.
Access to cheap energy has been crucial for the industrial base. However, after post-pandemic price surges, EU natural gas prices in 2024 remained approximately five times as high as in the US. This compares with prices being approximately 1.8x US prices in 2019.
One way to address high energy costs is through greater investment in power infrastructure to better integrate growing volumes of intermittent solar and wind-powered electricity. However, relying primarily on private sector commitments will keep German electricity prices among the highest in the EU (Figure 2) as firms pass costs to end-users.
