With a gross domestic product (GDP) of 4.186 trillion euros in 2023, Germany is the third-largest economy in the world after the United States and China. Its population of 84.3 million also makes it the largest consumer market in the European Union.
Several sectors contribute to Germany’s economic growth, including exports of motor vehicles and parts and chemical products, making the country the third-largest exporting nation in the world. According to KPMG, the service sector contributes the largest share of the country’s economy, with a 70 percent share of the GDP.
Germany is also a top destination for investors, attracting an increasing number of companies seeking to make greenfield investments. Due to its Central European location, Germany is attractive to investors as Europe’s largest economy. However, the current deterioration of economic conditions has impacted investor sentiment and overall growth in the country.
Overview of the German economy
Germany boasts a highly developed social market economy, making it the largest national economy in Europe and the third-largest by nominal GDP globally. However, the country’s GDP, measured in dollars, can fluctuate significantly due to volatile currency exchange rates. According to the International Monetary Fund (IMF), in 2017, Germany accounted for 28 percent of the euro area economy. As a founding member of the European Union and the eurozone, Germany plays a pivotal role in the region’s economic stability.
The service sector is the backbone of the German economy, contributing around 70 percent of the total GDP. Industry follows with a 21 percent share, while agriculture accounts for a modest 0.9 percent. Exports are a significant driver of economic activity, representing 50.3 percent of national output, which positions Germany as the largest manufacturing economy in Europe. The country’s robust social security system, which comprises roughly 20 percent of GDP, provides a buffer against financial downturns.
Germany is renowned for its applied research with practical industrial value, generating substantial knowledge within its own laboratories. Germany’s social security system is highly efficient and strong among OECD members. The country is also rich in natural resources, including timber, lignite, potash, and salt, with some minor sources of natural gas being exploited in Lower Saxony.
Germany’s growth into a global economic power
Following the end of World War II, the Federal Republic of Germany’s economy struggled significantly. According to Investopedia, industrial output fell by a third, and the country’s housing stock declined by 20 percent. In addition, food production was half the level it was before the start of the war. Food rations and price controls on other goods and services led to shortages and a massive black market.
Germany’s currency at the time, the Reichsmark, had lost most of its value, requiring the population to exchange goods and services.
Erhard’s economic recovery plan
Following years of political divide, Walter Eucken emerged as one of the most important players in Germany’s recovery from a divided state into a global economic power. Eucken studied economics at the Universities of Bonn, Kiel, and Jenna. His ideas were firmly rooted in free-market capitalism. He also supported having a strong central bank independent from the government, which focused on using monetary policies to keep prices stable.
Once Germany lost the war, Ludwig Erhard, a World War I veteran who attended business school and a student of Eucken, was appointed finance minister of Bavaria. He worked his way up to become the director of the economic council for the occupied western half of Germany. Erhard began formulating a plan to bring West Germany’s economy back to life. He was later known as the “father of the German economic miracle.”
First, he played a large role in issuing a new currency instead of the Reichsmark, introduced in 1948. In addition, he implemented large tax cuts to support spending and investment. West Germany’s economy almost instantly revived.
The Marshall Plan
Further supporting Germany’s rebirth was the European Recovery Program, also known as The Marshall Plan. Crafted by U.S. Secretary of State George Marshall, this act included the United States giving more than $15 billion (around $173 billion in 2020 prices) to European nations affected by World War II, with a large share of this support going to Germany.
West Germany’s growth continued over the years. By 1958, its industrial production was four times higher than just one decade earlier.
When the reunification of East and West Germany began, the eastern parts of the country had only 30 percent of the per capita GDP of the western half. Over 30 years later, East Germany still has only about 75 percent of the GDP of its counterparts.
Key sectors contributing to GDP growth
Almost 80 years after World War II, Germany is now a global industrial and manufacturing powerhouse. German companies have played a significant role in this transformation, particularly through their export activities and economic contributions. Several sectors contribute to Germany’s GDP, including the service sector, industrial sector and construction sector:
Service sector
In 2023, the services sector’s share of Germany’s GDP was 70 percent. Around 80 percent of businesses work in this sector, which provides three-quarters of all jobs and employs around 30 million people.
The service sector produces intangible goods. According to the U.S. Census Bureau, it includes various service industries, including warehousing and transportation services, information services, securities and other investment services, professional services, waste management, health care and social assistance, and arts, entertainment, and recreation. Countries with economies that rely on the service sector are usually more advanced than industrial or agricultural economies.
In the first half of 2024, the service sector in Germany grew by 1.6 percent from a year ago, according to data from the German Economic Institute IW.
Last year, Germany had the highest value of services exports at €407 billion and services imports at €470 billion among the EU countries, according to Eurostat.
Industrial production
Germany’s manufacturing sector accounts for 21 percent of the national GDP. The industrial development of Germany can be traced back to the establishment of the German Empire on 18 January 1871. Four sectors dominate Germany’s industrial sector: Automotive, mechanical engineering, chemical and electrical industry. Global players in the country include Volkswagen, Daimler, BMW, BASF, the world’s largest chemical company with around 118,000 employees, and Siemens.
In 2020, the manufacturing sector employed 7.5 million people, of which 1.1 million worked in mechanical engineering, making it the largest industry in Germany. The turnover of companies in the manufacturing sector reached 2.096 trillion euros, with the automotive industry leading the way with 459 billion euros.
The German economy has been stagnating for more than two years. According to a recent report by the ifo Institute, the overlapping effects of structural change and the economic downturn are particularly evident in the country’s manufacturing sector.
The sector’s competitiveness is suffering from higher energy costs and increasing competition from China for high-quality industrial goods.
The manufacturing industry is also struggling with the weakening of the global industrial sector and the lack of new orders. The persistently high interest rate level, alongside the elevated economic and geopolitical uncertainty, is likely to have weighed heavily on the investment activities of companies and the tendency of private households to make purchases.
German industry expects a 3 percent fall in production in 2024, the third year of decline, with no recovery in sight for 2025, stated the Federation of German Industries recently.
In September, car manufacturing recorded a 6.9 percent annual drop in production, while in mechanical and electrical engineering it was down 8.5 percent and 10.7 percent, respectively. The federation also forecasts a 0.5 percent decline in German exports in 2024, as global trade in goods increases by 2 percent.
Construction
The construction market is also a key component of Germany’s GDP. According to Statista, in 2023, the sector made up over 6 percent of the country’s GDP. The key sectors in the German construction market are commercial, industrial, infrastructure, energy and utilities, institutional and residential construction.
Similar to the country’s manufacturing sector, the construction market is also declining. The Roland Berger Construction Trend Radar 2024 report says that after two years of decline, the German construction market will shrink once more in 2024, with a 5 percent decline forecast.
January 2024 saw the lowest order income value in the residential segment since January 2018. However, orders started to pick up. February 2024 saw a 19 percent rise, with a 21 percent uptick in March. In Q2, growth stabilized but the overall figures remain well below the levels of Q1 2023.
According to official data, permits for newbuilds dropped 24.2 percent in May compared to the same month last year and nearly 40 percent compared to May 2022.
The data also shows that, between January and May 2024, permits for single-family homes fell over 31 percent, and those for multi-family houses declined over 21 percent compared to the same period last year.
However, this negative trend is set to bottom out in 2024, before the market stabilizes in 2025 and grows again in 2026. A more stable civil engineering market is key to this gradual change.
The energy, telco and public transport sectors are now beginning to drive growth in sales, order income and order backlog. However, Germany’s residential market paints a more mixed picture. The new-build segment is set to continue its significant decline through 2025 before stabilizing in 2026.
Germany’s 2023 GDP trends
According to the Federal Statistical Office, Germany’s GDP fell by 0.3 percent in the last quarter of 2023. Government spending also affected economic performance, with fluctuations impacting growth and recovery efforts. Faced with high inflation, high interest rates and a low demand for German exports, Europe’s largest economy saw its GDP fall 0.3 percent for 2023.
In the first three quarters, Germany’s GDP largely stagnated amidst a challenging global economic environment. In the fourth quarter of 2023, exports of goods and services were down 1.6 percent after price. The decline in imports was somewhat larger, at 1.7 percent. Subdued foreign demand, ongoing geopolitical tensions and high energy prices led to weaker trade in goods.
The biggest drops in gross value added were in construction and manufacturing last year. While the production of motor vehicles, trailers and semi-trailers increased, many other sectors, such as the manufacture of machinery and equipment, the manufacture of electrical equipment, the manufacture of fabricated metal products, and the chemical industry declined. In the service sector, almost all branches were able to expand their economic activities compared with the same quarter a year earlier.
Economic Indicators
Germany’s economic indicators present a mixed picture. The GDP growth rate has been sluggish in recent years, contracting by 0.10 percent in the second quarter of 2024 compared to the previous quarter. However, the economy rebounded in the third quarter of 2024, with GDP rising 0.1 percent annually.
Inflation has increased recently from 2 percent in October to 2.2 percent in November. The low unemployment rate, standing at 3 percent in October 2024, reflects a resilient labor market. The labor force participation rate has also been high, with 46.1 million residents and citizens actively participating in the workforce.
Germany’s trade balance has been positive, with a trade surplus of $14 billion in October. Key sectors such as automotive and machinery drive the country’s exports. The top 10 exports include vehicles, machinery, chemical goods, electronic products, electrical equipment, pharmaceuticals, transport equipment, basic metals, food products, and rubber and plastics. This diverse export portfolio underscores Germany’s strength in high-quality industrial goods and its significant role in the world economy.
What is Germany’s current GDP?
The Federal Statistical Office reported that Germany’s GDP rose by 0.1 percent quarter-on-quarter in Q3 of 2024. However, economic performance dropped 0.3 percent in the second quarter after rising by 0.2 percent in the first quarter. Following this generally subdued performance in the first half of 2024, the German economy began the second half of the year with modest growth.
The service branches improved their overall economic performance in Q3, rising 1.1 percent compared to the third quarter of 2023. In contrast, the industrial sector’s economic performance was down 1.9 percent compared to the same quarter a year earlier. Meanwhile, manufacturing again registered a substantial decline of 2.0 percent, and energy suppliers increased their price-adjusted value added for the first time since Q1 of 2021.
Eurostat expects Germany’s GDP to decline by 0.1 percent in 2024. High uncertainty has been weighing on consumption and investment, and the trade outlook has worsened as global demand for industrial goods weakened.
Going forward, domestic demand is set to pick up, driven by increases in real wages. This is expected to support a recovery in GDP growth to 0.7 percent in 2025 and 1.3 percent in 2026. The government deficit is projected to decrease and the government debt ratio to stabilize at around 63 percent of GDP.
The European Commission’s Autumn Forecast projects GDP growth in 2024 at 0.8 percent in the euro area and a 0.1 percent GDP contraction in Germany. This is a downward revision from the previous forecasts, which projected growth of 0.1 percent.
2025 GDP forecasts
The OECD recently trimmed its forecast for German economic growth next year due to political uncertainty and tight fiscal policy, but it still anticipates stagnation this year. The world’s third-largest economy is expected to grow by 0.7 percent in 2025, down from 1.1 percent, as previously forecast.
Meanwhile, the IMF expects Germany’s economy to grow by 0.8 percent, down from a growth of 1.3 percent previously. The IMF added that inflation in Germany will likely fall to 2.4 percent this year from 6 percent last year and decline to 2 percent in 2025. Meanwhile, the eurozone economy will likely grow by 0.8 percent in 2024 and 1.2 percent in 2025.
On the other hand, the Bundesbank’s December Forecast for Germany projects a 0.2 percent decline in calendar-adjusted real GDP this year and only a slight growth of 0.2 percent next year.
For next year, the European Commission expects a recovery, with 0.7 percent growth, cutting the spring forecast of a 1 percent expansion.
2026 GDP forecasts
In its economic outlook for 2026, the OECD forecasts an acceleration of growth in Germany’s GDP to 1.2 percent. Low inflation and rising wages will support real incomes and private consumption.
Meanwhile, the Bundesbank’s December Forecast predicts that the German economy will experience stronger growth of 0.8 percent and 0.9 percent in 2026 and 2027, respectively.
The European Commission’s Autumn Forecast expects German growth to accelerate to 1.3 percent in 2026, but it will still be below the eurozone average of 1.6 percent. Overall, domestic demand will likely become the main driver of economic growth in 2025 and 2026.
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Factors impacting Germany’s economic growth
In 2020 and 2021 Germany weathered the COVID-19 pandemic’s devastating economic effects better than any of its EU neighbors thanks in large part to its fiscal space, a large current account surplus, generous economic stimulus packages, and flexible short-term work schemes that kept unemployment at only 5.7 percent in summer 2021.
An easing of pandemic restrictions and a rebound of the services sector led to 2.8 percent real GDP growth in 2021, but the Russian invasion of Ukraine caused a smaller-than-expected GDP growth in 2022 at 1.9 percent. Demographic changes and resulting labor shortages, inflation and high energy prices due to Russia’s war against Ukraine dampened Germany’s near-term GDP outlook.
High energy prices arising from the shut-off of Russian gas contributed to a surge in inflation during 2022 and 2023, which in turn weighed on economic activity. However, the impact of this shock was greatly mitigated by a strong policy response, including the provision of income support while preserving incentives to conserve energy.
Germany is still the most distressed country in Europe, with consumers and businesses alike skeptical of making new investments as the cost of living crisis and the lingering effects of the pandemic and the Russia-Ukraine war continue. Liquidity has also taken a hit, which is having spillover effects on profitability as overall economic growth continues to be sluggish.
However, signs of easing inflation, stable unemployment, and low energy costs offer some optimism for recovery in the near future.
