Short term recovery of the German economy: structural problems to be solved (Economic perspective)
Recently, the German economy has shown an unexpected recovery. According to data from the German Federal Statistical Office, since the fourth quarter of 2025, Germany's gross domestic product (GDP) has grown quarter on quarter for three consecutive quarters, breaking away from the previous situation of hovering on the brink of stagnation and recession. In early September, major economic research institutions in Germany raised their economic growth expectations for this year, with a general expectation of a growth rate between 1.2% and 1.4%, significantly better than their previous predictions. This change sends a positive signal that the German economy is recovering from its previous downturn. But it should also be noted that the current recovery is closer to a cyclical rebound, and the development of the German economy still needs to solve a series of structural problems.
This round of economic recovery in Germany is primarily due to improved external demand. Germany is a highly outward oriented economy, with exports accounting for over 40% of its GDP. In the first half of this year, Germany's exports have grown again, especially with strong performance in exports to the EU market. The demand for chemical, electrical equipment, data processing, and optical equipment has rebounded, becoming an important support. The recovery of European economic activity and the expansion of infrastructure and defense investment have brought order recovery to the German manufacturing industry. Meanwhile, the global investment boom in artificial intelligence has driven an increase in demand for data centers and related equipment, benefiting some German companies as well.
Secondly, countercyclical fiscal policy stimulus has become a new supporting force. Compared to the past emphasis on fiscal balance, there has been a significant change in Germany's macro policy orientation. In 2025, Germany will adjust its "debt brake" system, giving the green light to use fiscal stimulus measures to boost the economy, especially opening up greater fiscal space for some defense and security expenditures, including the establishment of a 500 billion euro infrastructure and climate neutrality special fund. The expenditures in the fields of railways, highways, digital infrastructure, energy transformation, and national defense and security have expanded accordingly. Public investment and government consumption have supported demand in the short term and directly benefited fields such as construction, machinery and equipment, and defense industry.
In addition, the weaker energy shock compared to previous concerns also provides space for economic recovery. The conflict between the United States, Israel, and Iran, as well as the Gulf situation, once again raised concerns in the market that Germany would face a similar energy shock as in 2022. However, after adjusting import sources, building LNG receiving facilities and improving cross-border pipeline network in recent years, Germany's natural gas supply channels are more diversified than those at the beginning of the Russia-Ukraine conflict. Currently and in the future, energy prices remain a significant risk point for the German economy, but short-term shocks have not yet reached the most pessimistic predictions.
Currently, the sustainability of Germany's economic recovery still needs to be carefully observed. On the one hand, the improvement in exports is largely influenced by the rebound in European demand, the investment cycle in artificial intelligence, and supply chain changes brought about by geopolitical conflicts, and has a certain degree of periodicity. The Kiel Institute for World Economy believes that Germany's commodity exports have generally recovered to the level of 2019, but the scale of global commodity trade has significantly expanded during the same period, which means that Germany's lost global market share in recent years has not truly recovered. On the other hand, fiscal expansion can expand short-term demand, but it is difficult to replace long-term corporate investment and productivity improvement.
From a deeper perspective, the structural problems of the German economy still exist. The slow digitization and industrial transformation, high energy and labor costs, complex administrative approval procedures, and aging population are still affecting the investment willingness and economic recovery of enterprises. Some traditional industries such as the automotive industry are still in the process of structural adjustment.
From an international perspective, the long-term development of the German economy cannot be separated from an open and stable external environment. For Germany, which is highly dependent on global trade and industrial exports, while improving the domestic business environment, promoting technological innovation and industrial transformation, continuing to maintain open and stable economic and trade relations with external economies such as China is conducive to expanding markets, reducing supply chain risks, and creating new growth opportunities for enterprises.
Overall, the unexpected recovery of the German economy is an important signal for the country to emerge from a cyclical downturn. But short-term repair does not mean long-term strengthening. The German economy still faces deep-seated challenges such as energy costs, labor constraints, administrative efficiency, industrial transformation, and reshaping global competitiveness. Whether the window period dividends created by improved exports and fiscal expansion can be transformed into sustainable endogenous growth drivers will determine how far the German economy can go in this cycle of warming.