German Economy Grows for First Time Since 2022: A Turning Point for Europe’s Industrial Powerhouse

Jan 16, 2026 - 05:00

Germany’s troubled economy returned to modest growth in 2025 after two consecutive years of contraction, marking a critical turning point for Europe’s largest economy as massive government spending on defense and infrastructure begins to reshape the nation’s industrial landscape. The German Federal Statistical Office (Destatis) reported Thursday that gross domestic product expanded 0.2% in 2025, reversing declines of 0.9% in 2023 and 0.5% in 2024.

The expansion, while modest, represents a watershed moment for an economy that has struggled to adapt to deglobalization, energy price shocks, and intensifying competition from Chinese manufacturers. The growth comes as Berlin deploys an unprecedented €500 billion infrastructure fund and dramatically scales up defense spending in response to geopolitical pressures following Russia’s invasion of Ukraine.

The End of Europe’s Growth Engine Stagnation

Germany’s decade-long economic underperformance has been one of Europe’s most pressing business challenges. Throughout the 2010s, the country’s export-oriented model delivered average annual GDP growth of 1.1%—an impressive performance when eurozone peers struggled with financial crises and sovereign debt turmoil. However, that model began failing as globalization stalled, energy costs soared following the Ukraine war, and the country’s vaunted automotive sector faced existential threats from electric vehicle transitions and Chinese competition.

“Germany’s export business faced strong headwinds owing to higher U.S. tariffs, the appreciation of the euro and increased competition from China,” Destatis head Ruth Brand said in a statement. The fourth quarter of 2025 also recorded 0.2% growth, suggesting momentum is building as government stimulus begins flowing through the economy.

The growth was primarily driven by stronger consumer and government spending, which offset continued weakness in exports. Factory orders and industrial production rose for three consecutive months through November 2025—the first such sustained increase since 2022—driven predominantly by defense procurement and infrastructure contracts.

Historic Fiscal Revolution: Breaking the Debt Brake

Germany’s return to growth coincides with the most dramatic shift in fiscal policy since reunification. In March 2025, parliament passed constitutional reforms that fundamentally altered the country’s approach to public spending, abandoning decades of fiscal conservatism enshrined in the “Schuldenbremse” (debt brake) that limited federal borrowing to 0.35% of GDP.

The reforms include three transformative elements: exempting all defense spending above 1% of GDP from fiscal rules, creating a €500 billion special fund for infrastructure and climate neutrality over twelve years, and raising borrowing caps for federal states from 0% to 0.35% of GDP. These changes enable Berlin to borrow €174.3 billion in 2026 alone—more than triple the €50.5 billion borrowed in 2024.

Finance Minister Lars Klingbeil defended the strategy as essential for reversing structural decline. “We’re focusing on growth and fairness,” he said when announcing the 2026 budget. “Our top priority is to safeguard jobs and pave the way towards renewed economic strength.” The 2026 federal budget totals €524.5 billion, with investment spending reaching a record €126.7 billion when including special fund allocations.

These fiscal policy shifts reflect broader European business trends toward prioritizing strategic investment over austerity, particularly in defense and green infrastructure. Germany’s abandonment of fiscal orthodoxy sends powerful signals across the continent about changing priorities in an era of great power competition.

Defense Spending Surge Reshapes Industrial Landscape

Defense spending represents the most dramatic component of Germany’s fiscal transformation. Total defense outlays will reach €108 billion in 2026, combining €82.7 billion from the core budget with €25.5 billion from the Bundeswehr special fund. By 2029, defense spending will hit €162 billion—representing 3.5% of GDP and positioning Germany to field Europe’s strongest conventional army.

The defense boom is creating windfall opportunities for German industrial giants. Rheinmetall, the country’s largest defense contractor, has seen its stock price surge alongside soaring order books for artillery systems, armored vehicles, and ammunition. The company is leading a €3.8 billion project to modernize the Panzerhaubitze 2000 artillery system over the next decade. Frankfurt’s DAX index gained over 25% in the twelve months preceding the GDP announcement, driven largely by defense sector enthusiasm.

The military buildup is also pulling in unexpected participants. According to the Federation of German Security and Defence Industries, membership surged from 243 companies in November 2024 to 440 by early 2026, with most new entrants being small and medium-sized enterprises from automotive and machinery sectors seeking stable government contracts as traditional export markets weaken.

Germany’s rearmament represents a geopolitical realignment with profound implications for European business leaders navigating a more militarized continental landscape. The United States has welcomed Berlin’s commitment to meeting and exceeding NATO’s 2% GDP defense target, while Russia faces the prospect of a militarily resurgent Germany on NATO’s eastern flank.

Infrastructure Investment: Railways, Energy, and Digital Networks

Beyond defense, Germany’s €500 billion infrastructure fund targets decades of underinvestment in transport, energy, and digital infrastructure. Transport spending alone will reach €33.7 billion in 2026, with €166 billion allocated for the 2026-2029 period. Deutsche Bahn, the state railway company, is pursuing a €100 billion modernization program to upgrade aging rail networks that have suffered chronic delays and capacity constraints.

Energy infrastructure improvements focus on grid modernization to accommodate renewable energy integration, with €50 billion earmarked for transmission upgrades and 20 gigawatts of new gas-fired power plants to provide backup capacity. The government is also fast-tracking 5G network expansion to address Germany’s digital infrastructure deficit relative to Asian and North American competitors.

Construction firms like Züblin AG and Strabag AG are major beneficiaries. Züblin’s order backlog surged 15.9% to €9.4 billion in 2025, driven by contracts for Berlin’s Hauptbahnhof expansion and renewable energy projects. After suffering a 1.8% real decline in 2025, the construction sector is forecast to rebound with 3.1% annual growth through 2029.

These infrastructure investments align with European commercial real estate trends showing renewed confidence in long-term infrastructure-linked assets following years of uncertainty.

Persistent Headwinds and Export Challenges

Despite positive GDP figures, significant challenges remain. Germany’s export sector—traditionally the economy’s crown jewel—continues struggling under multiple pressures. Exports fell 2.1% in 2024, reflecting sustained loss of market share to Chinese competitors, particularly in automotive and industrial equipment sectors. President Donald Trump’s imposition of higher U.S. tariffs on European goods in 2025 further squeezed German exporters, while a strengthening euro made products less competitive globally.

The automotive sector faces particularly acute difficulties. Volkswagen, BMW, and Mercedes-Benz are battling to convince consumers to switch to electric vehicles while simultaneously competing with Chinese manufacturers offering EVs at substantially lower prices. The sector’s struggles reflect broader challenges facing established German industrial champions in adapting to rapid technological change and shifting global demand patterns.

Energy costs remain problematic despite falling from 2022 peaks. Wholesale energy prices stand approximately 80% higher than pre-Ukraine war levels, compared to just 25% increases in the United States and 5% in China. Germany’s decarbonization commitments compound competitive disadvantages, as carbon prices must rise substantially to meet 2045 climate neutrality targets.

Cautious Optimism for 2026 and Beyond

Economists express cautious optimism that Germany’s growth trajectory will strengthen as infrastructure spending accelerates. Goldman Sachs Research forecasts GDP growth of 1.4% in 2026 and 1.8% in 2027—well above Germany’s estimated potential growth rate of 0.8%. The Bundesbank projects 0.6% growth for 2026 and 1.3% for 2027, while KfW Research lifted its 2026 forecast by 0.5 percentage points to 1.5%.

“The stimulus is starting to work,” said Holger Schmieding, chief economist at Berenberg Bank. “That momentum should really pick up now over the course of this year.” Robin Winkler, chief German economist at Deutsche Bank, noted that while higher 2025 growth doesn’t yet signal sustained recovery, “big players such as defense groups continue to ramp up capacity.”

However, significant implementation risks remain. European market observers note that infrastructure spending has historically underdelivered relative to targets in Germany, plagued by bureaucratic delays, planning permission bottlenecks, and skilled labor shortages. The 2025 budget already allocated less to infrastructure than originally planned after shifting resources to social spending and electricity subsidies.

The medium-term fiscal sustainability of Germany’s spending spree also faces scrutiny. Public debt is projected to reach 80.25% of GDP by 2029, up from 62.5% today, while debt servicing costs are expected to double. The European Commission has endorsed Germany’s fiscal plan but warned that sharp expenditure reductions after 2026 may be necessary to comply with EU fiscal rules—potentially undermining growth momentum just as it builds.

The Verdict: Turning Point or False Dawn?

Germany’s 0.2% growth in 2025 marks a genuine inflection point after years of stagnation, validating Berlin’s gamble that massive fiscal stimulus can overcome structural economic weaknesses. The defense and infrastructure spending boom is creating tangible opportunities for German industry while positioning the country as a more credible security partner within NATO.

Yet fundamental challenges persist. Germany must simultaneously modernize its industrial base, manage energy transition costs, compete with subsidized Chinese manufacturers, and navigate potentially hostile U.S. trade policy—all while maintaining fiscal sustainability and social cohesion. The success of Berlin’s economic revival ultimately depends on whether government spending catalyzes private sector dynamism or merely delays necessary structural reforms.

For now, European business leaders and policymakers are watching Germany’s experiment closely. If Europe’s industrial powerhouse can successfully leverage fiscal firepower to reignite growth, it may provide a template for other struggling economies. If Berlin’s spending spree fails to deliver sustained expansion, it will raise profound questions about Europe’s economic model in an increasingly competitive and militarized global landscape.