March 25, 2025: Germany’s economy has entered a technical recession following two consecutive quarters of negative growth. Data from the Federal Statistical Office confirmed a 0.4% contraction in Q1, after a revised 0.5% decline in the final quarter of the previous year.

The downturn is attributed to a mix of weak industrial output, subdued consumer spending, and persistent inflationary pressures, compounded by energy cost volatility and sluggish global demand for German exports. The manufacturing sector—a cornerstone of Germany’s economic strength—has been significantly affected, with automotive and machinery exports falling sharply amid supply chain disruptions and softening demand from China and the U.S.

Household consumption remains depressed as real wages continue to lag inflation despite modest improvements in the labor market. Retail sales have stagnated, and confidence surveys suggest declining consumer sentiment, with energy costs and housing expenses cited as the primary concerns. Higher interest rates from the European Central Bank have also weighed on housing investment and business lending.

Fiscal constraints have limited Berlin’s room to maneuver. While targeted stimulus measures remain under discussion, the government has prioritized debt reduction and energy transition investments rather than broad-based spending to stimulate short-term demand. Some coalition members are pushing for temporary tax relief or subsidies to ease pressure on middle-income households, but no consensus has been reached.

Economists are divided on whether Germany’s recession will deepen or remain shallow. Some argue that a recovery could begin later this year if energy prices stabilize and global trade conditions improve. Others warn that structural vulnerabilities—particularly overreliance on industrial exports and energy imports—are becoming long-term liabilities.

The outlook for the eurozone is also under pressure, with Germany accounting for nearly a quarter of the bloc’s GDP. If the contraction persists, spillover effects could hinder recovery efforts across Europe.

The Bundesbank is expected to revise growth projections downward in its following quarterly report. Private sector forecasters are already adjusting expectations, warning of stagnation risks without more substantial domestic investment and policy coordination at the EU level.