Germany’s economy, the largest in the EU, is projected to contract for a third consecutive year in 2025, marking its most prolonged downturn since World War II.
The Handelsblatt Research Institute (HRI) forecasts that Germany is headed for its longest post-war recession, with a projected 0.1% decline in 2025, following contractions of 0.3% in 2023 and 0.2% in 2024.
This extended economic slump, exceeding the two-year recession of the early 2000s, is attributed to the combined impact of an energy crisis, persistent inflation, and the lingering effects of the Covid-19 pandemic.
“Germany’s economy is facing its most significant crisis in post-war history,” HRI chief economist Bert Rurup stated.
Further straining the economy are demographic challenges, including an aging population. The HRI estimates Germany’s annual growth potential has diminished to a mere 0.5%.
“The economy is entering a period of rapid aging,” Rurup observed. Official figures from the Federal Statistical Office, anticipated on January 15, are expected to confirm the 2024 contraction.
While the HRI predicts a modest recovery in 2026, with growth projected at only 0.9%, this remains significantly below pre-crisis levels. The German central bank has also lowered its 2025 growth forecast from 1.1% to 0.2% in December.
Germany’s transition from affordable Russian natural gas to pricier liquefied natural gas (LNG) from the US has fueled energy costs, severely impacting manufacturers and small businesses. These increased costs have triggered closures and bankruptcies across various sectors, including prominent companies like Volkswagen.
Prior to the escalation of the Ukraine conflict in 2022, over half of Germany’s energy needs were met by Russian gas. Following EU sanctions against Moscow, gas supplies were drastically reduced or completely halted. In September 2022, the Nord Stream pipelines, which transported Russian gas to Germany, were damaged by explosions. On January 1, 2025, Russia formally suspended gas transit to the EU via Ukraine.
Germany’s export sector, especially high-value manufacturing, remains a relative economic strength. However, it also faces headwinds from global uncertainties and elevated energy prices.
The loss of affordable Russian energy and escalating costs have hindered recovery. Former Chancellor Angela Merkel recently criticized the decision to forgo Russian gas. In a December interview with France 2 TV, she described the previous arrangement as a “win-win situation,” noting it provided Germany with low-cost energy, while now prices have “exploded.”
The economic crisis has become a major concern for German citizens. A December poll by public broadcaster ARD indicated that the economy is the top issue for voters. An early general election is scheduled for February 23 following the November collapse of Chancellor Olaf Scholz’s center-left coalition.