The Economic Situation in the Federal Republic of Germany in January 2026

Economy shows modest recovery at year-end

After stagnating in Q3, Germany’s economy picked up slightly towards the end of the year. Preliminary data from the Federal Statistical Office indicate that real GDP in the fourth quarter of 2025 rose by 0.2% quarter-on-quarter, after adjusting for prices, calendar effects, and seasonal variations.

For 2025 as a whole, real GDP was 0.2% higher than in 2024. Growth was supported primarily by a continued rebound in private and public consumption, while changes in inventories also added arithmetically to GDP growth. In contrast, investment in machinery, equipment and construction declined on average over the year. Net foreign trade had a clearly negative impact, as exports fell slightly while imports rose, dampening GDP growth.

Germany’s economy is showing signs of a gradual recovery around the turn of the year, supported by a noticeable rise in order intake and higher manufacturing output in recent months. Producers of capital goods recorded a strong upturn in the final quarter, likely reflecting, in part, the progressive implementation of defence-related contracts.

Vehicle production figures from the VDA in December, together with the Truck Toll Mileage Index – a leading indicator of industrial output – rose by more than 3% month-on-month, after seasonal and calendar adjustments. This marks the strongest increase reported since March 2021 and points to a continued recovery in industrial production at year-end.

The expansion in capital goods production is expected to translate on the expenditure side into higher investment in equipment towards the end of 2025, as the latter is driven primarily by domestic orders. Rising registrations of commercial vehicles in the fourth quarter are also likely to provide additional support to investment in equipment.

In the construction sector, activity is expected to stabilise at the end of 2025, with positive momentum coming mainly from civil engineering, largely supported by public contracts. 

By contrast, more export-oriented sectors continued to face pressure. Weakened by subdued foreign demand, higher US tariffs, and a deteriorating competitive position, export activity in Q4 likely remained weak. Imports have also recently declined.

Despite a slight weakening in consumer sentiment at the end of the year, private consumption in Q4 is expected to have grown modestly compared with the previous quarter. Retail sales in October and November were, on average, about 1% above levels in Q3. In the hospitality sector, turnover in October rose noticeably compared with the previous month, and new car registrations by private households increased by over 4% compared with the previous quarter, reflecting a clear year-end boost.

As fiscal measures continue to take effect, economic activity is expected to stabilise further at the start of 2026 and gain momentum over the course of the year. Nonetheless, the gradual deterioration in business and consumer sentiment at year-end does not yet suggest a broad-based upswing, underlining the persistently high risks and uncertainties for short-term growth prospects.

Global trade remains volatile and loses momentum

Global industrial production held roughly steady in October following the previous month’s increase, remaining 2.9% above the same month a year earlier. Output in advanced economies expanded slightly, while emerging markets saw a modest slowdown. Leading indicators point to a slight deceleration in global economic growth at the turn of 2025/26: the S&P Global World Purchasing Managers’ Index (PMI) fell again in December, from 52.7 to 52.0 points. While still above the growth threshold of 50, the reading signals positive but slightly slower momentum compared with the previous month. Sentiment weakened somewhat in both services and manufacturing. Investors, however, entered 2026 with greater confidence. According to the Sentix Index, sentiment improved across almost all world regions, with the US and Asia remaining key drivers of the upward trend anticipated in financial markets.

Global trade activity remains volatile. At the start of the fourth quarter of 2025, some signs of a slowdown appeared following earlier gains. International trade in goods fell by 1.3% month-on-month but remained over 3% above October 2024 levels. A further weakening in trade activity is signalled by the RWI/ISL container throughput index, which declined slightly, down from 138.1 to 137.5 points in November (seasonally adjusted), placing it roughly at early-2025 levels. Although activity in European ports has recently picked up – helped by the resolution of the Antwerp strike – it continues to lag global container throughput.  Analysts expect global trade momentum to ease at the turn of 2025/26, due in part to higher trade barriers, before gradually recovering. Overall, the expansion of global trade is expected to moderate in 2026 compared with the robust growth seen last year.

Foreign trade falls sharply again in november

After a brief period of stability, nominal exports of goods and services fell sharply in November, down 3.0% month-on-month (seasonally and calendar-adjusted), with nearly all sectors affected. Contrary to the overall trend, shipments to the EU declined noticeably, while exports to non-EU countries – supported in part by higher sales to China – only fell slightly. Overall, exports remained roughly at third-quarter levels. Nominal imports of goods and services also declined in November, down 0.5% month-on-month, following a drop in the previous month. Imports from the EU fell, while goods sourced from third countries such as the US and China increased significantly compared with October. Compared with the previous quarter, total imports were 0.4% higher than in Q3. The monthly trade surplus narrowed to €6.3 billion in November (seasonally adjusted), down from €10.1 billion, as exports fell more sharply than imports. From January to November, the surplus totalled €106.6 billion, nearly 33% lower than in the same period last year.

Import prices rose further in November, up 0.5% month-on-month (seasonally adjusted), driven mainly by energy and intermediate goods. At the same time, export prices rose by only 0.3%, causing Germany’s terms of trade to deteriorate slightly by 0.3% month-on-month, the first decline since June 2025. In real terms, the declines in exports and imports were likely somewhat larger.  

Leading indicators for foreign trade at the turn of 2025/26 remain subdued. According to the ifo Export Expectations, the external economic outlook for Q1 of 2026 is cautious. In December, the index rose only slightly, moving from -3.8 to -3.1 balance points. Key export sectors such as automotives and machinery continue to anticipate weaker foreign business. However, export orders from abroad showed some recovery in November, rising 4.9% month-on-month (seasonally adjusted) due to large contracts. Demand for German investment and intermediate goods from foreign companies in the eurozone increased, and other regions also placed more orders in these segments. Excluding large contracts, foreign orders were still slightly down month-on-month (-0.3), while over the past three months they edged up (+0.2%).  

Overall, the outlook for German exporters remains challenging. While the global economy and world trade have so far proven resilient, a slowdown at the turn of the year – as anticipated by international observers – is emerging. A gradual recovery in exports is not expected until later in the year. 

Production and Orders continue on an upward trend

Output in the goods-producing sector rose for the third consecutive month in November. Month-on-month, output increased by 0.8% (adjusted for or price, seasonal and calendar effects). At the same time, September production was revised slightly higher, to +2.0% (previously +1.8%). Compared with November 2024, goods output was also up 0.8%.

Industry was the main driver, with output expanding 2.1% month-on-month. As in previous months, growth was driven by capital goods output (+4.9%), while consumer and intermediate goods production declined slightly (-0.3% and -0.8%). Construction output fell 0.8%, after a gain in the previous month, with building down 0.9% and civil engineering down 0.1%. The largest drop occurred in the energy sector, where production fell 7.8%.

Within the industrial sector, developments varied across industries.  Significant increases were recorded in vehicle and vehicle parts production (+7.8%), pharmaceuticals (+4.7%), mechanical engineering (+3.2%), and metal products (+1.3%). Most other sectors saw declines, including data processing and optical equipment (-4.0%), chemicals (-3.4%), and food and animal feed (-3.6%). Energy-intensive industries overall fell 1.5% month-on-month.

In the more stable three-month comparison, output in the goods-producing sector rose 0.7% versus June-August, with industry and energy production each up 0.7% and construction gaining 0.6%.

Following the upward trend in production, order intake in manufacturing also continued to recover in November. Order volumes (adjusted for price, seasonal and calendar effects) rose 5.6% month-on-month. A surge in large domestic orders also pushed three-month growth up 4.0% compared with the previous quarter. Excluding large contracts, orders still rose 2.1% in the three-month comparison. Compared with November 2024, the increase was an impressive 10.5%.

The strongest demand came from domestic customers, where orders – boosted by large contracts – rose 6.5% month-on-month. Foreign demand also increased noticeably, climbing 4.9%, with higher orders from both eurozone and non-EU countries. In the product groups, large orders were particularly visible in consumer and capital goods, which grew 8.2% and 7.9% respectively, while intermediate goods were up 1.0%.  

Most industries recorded higher order volumes. The largest increases were seen in clothing (+29.6%), metal products (+25.3%), other vehicle manufacturing (+12.3%), and IT & optics (+8.3%). The important automotive sector saw a moderate rise, up 0.8%, while orders fell in pharmaceuticals (-3.5%), metal production (-2.3%) and textiles (-1.0%).  

Against the backdrop of slightly stronger orders, especially from domestic demand, manufacturing output ended the year on a clear upward trend. Capital goods producers, including defence-related manufacturing, stand to benefit the most. A broader-based industrial recovery, however, continues to be constrained by subdued foreign demand, particularly from non-EU countries, with ongoing geopolitical and trade uncertainties continuing to have an impact.

Retail turnover drops; sentiment indicators soften

Real retail sales (seasonally adjusted, excluding motor vehicles) fell slightly, down 0.3% in November compared with the previous month, after October’s figure was revised upwards several times. Sales of non-food goods rose 0.7%, while food sales declined by 2.0%. Year-on-year, retail sales increased by 1.4% in November, with non-food retail up 2.7%, while food sales declined by 0.3%. Over a three-month period, total retail turnover edged up 0.3%, with non-food sales slightly lower and food sales slightly stronger (+0.3%). In the hospitality sector, turnover in October rose 2.1% nominally and 2.2% in real terms compared with September. Compared with the same month a year earlier, nominal sales were up 2.4%, while in real terms they fell slightly, down 0.9%.

New passenger car registrations fell 6.0% month-on-month in December, but rose 2.5% in the three-month comparison, and were actually 9.7% higher than in December 2024. Private registrations declined 10.5% month-on-month, but rose 4.3% in the three-month comparison, and were a significant 9.9% above December 2024. Registrations by businesses and the self-employed fell 3.5% month-on-month in December, but increased in the three-month and yearly comparison. Overall, 2025 saw a slightly stronger performance in new car registrations than 2024, though figures remain well below pre-COVID levels.  

After a slight contraction in private consumption in Q3 2025 (-0.3% quarter-on-quarter, the first drop in almost two years), leading indicators suggest a cautious outlook at the turn of the year. According to GfK forecasts, consumer confidence is expected to fall sharply in January, down 3.5 points to -26.9, after a slight rise of 0.7 points to -23.4 in December. Renewed weakness in income expectations and a marked increase in the propensity to save – reaching levels last seen during the 2008 financial crisis – weighed on sentiment. Willingness to make major purchases also declined and the only improvement was in economic expectations. The HDE retail barometer brightened slightly in January, after falling to its lowest level of 2025 in December. A survey indicated that only 17% of retailers were satisfied with the important Christmas trade, while two-thirds were dissatisfied. The ifo retail business climate (including motor vehicles) fell again in December, down one point to -28.5, with current conditions deteriorating for a second month, while expectations stabilised at a low level. Overall, consumer sentiment points to a cautious consumption outlook at the turn of 2025/26, weighed down by concerns over inflation, job security, social security sustainability, and tax burdens.

Inflation dips below 2% in december

Preliminary data show that inflation fell to 1.8% year-on-year in December, dropping below 2% for the first time since autumn 2024. Compared with November, prices were broadly unchanged. The annual average inflation rate for 2025 stands at 2.2%. Core inflation remained much higher, at 2.4%, with service prices rising 3.5%, goods prices up only 0.4%, food prices increasing 0.8%, and energy prices falling 1.3%.  

Price pressures are increasingly concentrated in services, reflecting domestic factors such as wages and personnel-intensive sectors including health, care, and social services, while import goods and energy have dampened overall price growth.

Consumer prices are expected to remain around or slightly below 2% in the coming months. Inflationary pressure in the services sector is likely to persist, while energy prices have trended downward – oil averaged $61/barrel in the last week versus $68 over the past year, gas €27 versus €35, and electricity €87/MWh versus €90. Measures such as lower grid use fees, the removal of the gas storage neutrality charge, and the reduced VAT rate for the hospitality sector have also eased price pressures. Producer prices for agricultural goods in particular have declined, which is likely to dampen food price inflation. Industrial goods prices have also fallen recently, while service prices continue to rise.

Labour market shows no year-end recovery

At year-end, the labour market remained broadly stable. Seasonally adjusted unemployment rose slightly (+3,000), while underemployment fell marginally (-3,000). The number of employed remained roughly unchanged in November (-1,000), and jobs subject to social security contributions stagnated in October (+/-0,000). Compared with a year earlier, employment fell slightly for the first time since spring 2021 (-11,000). Short-time work increased modestly in October (+15,000) but was down year-on-year, while notifications of short-time work in November showed no notable changes.

Leading indicators suggest that labour demand will remain subdued at the start of the year. Vacancies registered with the Federal Employment Agency remain low, and the ifo employment barometer deteriorated across all sectors in December. Only the construction sector shows tentative signs of employment growth in anticipation of extensive public infrastructure projects. The IAB employment barometer, covering both the private and public sectors, also declined slightly. A swift turnaround in the labour market is therefore not in sight at the start of the year.

Corporate insolvencies continue to rise

According to official statistics, the number of corporate insolvencies rose by 8.7% in October 2025 compared with September, reaching 2,108 filings, and were 4.8% higher than a year earlier. Compared with the pre-pandemic October average (2016–2019), insolvencies were up 28.9%, with affected jobs up 41.2% and expected claims up 38.3%. Drivers include subdued economic growth, structural challenges, rising costs, and geopolitical uncertainties.

The IWH insolvency trend for partnerships and corporations – methodologically narrower and more up-to-date than the official statistics – recorded 1,519 insolvencies in December, up 17% from the preceding month and 14% year-on-year. For the full year 2025, Germany registered 17,604 insolvencies of partnerships and corporations, 13.4% more than in 2024, affecting roughly 170,000 jobs.

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¹ This report is based on data that were available as of 15 January 2026. Unless stated otherwise, these are rates of change against the respective preceding period on the basis of price-adjusted figures which have also been adjusted for calendar-day and seasonal variations.