The Economic Situation in Germany in March 2025
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Economic weakness persists into the new year
The economic situation at the beginning of 2025 continues to be dominated by a high level of domestic and external economic uncertainty: in foreign policy terms particularly in view of the erratic U.S. trade policy and the outlook for the war in Ukraine; in domestic terms in view of the details and implementation of the fiscal policy proposals in the context of the ongoing talks about the formation of the next Federal Government.
Despite the recovery of output in the manufacturing sector in January, which was primarily driven by automotive manufacturers, no fundamental shift in the trend of industrial output is in sight. For example, the degree of capacity utilisation in industry declined further at the beginning of the year from what was already a low level, according to the ifo Institute. Falling volumes of new orders are again indicative of a persistent industrial weakness, as are the tangible drop in the Truck Toll Mileage Index as an indicator of industrial output, and the weaker data on automotive output in February from the German Association of the Automotive Industry (VDA). The services sector, which was able to compensate for some of the weakness in industrial and construction output last year, saw sharp declines in output, both of corporate and of consumer-related service providers.
The expected improvement in consumer spending does not appear to be taking place at the beginning of the year: following weak Christmas trading, the retail sector is beginning the new year with no more than a slight uptick, and there was a clear fall in the number of car registrations by private individuals in February.
Sentiment in the German economy has recently been mixed: the ifo Business Climate index remained unchanged in February, whereby the assessments of the current situation deteriorated somewhat, but expectations brightened. Service providers in particular took a more pessimistic view both of their current situation and of the outlook. The business climate amongst SMEs, as ascertained by the KfW and the ifo Institute, showed that the SMEs also took a more negative view both of their current situation and of the business outlook in February.
Other indicators of sentiment, such as the S&P Global Purchasing Managers’ Index or the ZEW Indicators of Economic Sentiment, have recently improved – from a low level – and suggest that the economy is bottoming out. The indicators from surveys of consumer sentiment are also sending mixed signals. Whilst the ifo Business Climate index saw slight improvements for retail trade (incl. vehicles), and the HDE consumer barometer also brightened slightly, the GfK Consumer Climate Survey was continuing to point downwards.
The persistently weak domestic and foreign demand coupled with increased uncertainties about the trade and geopolitical outlook are likely to continue to cause businesses and households to exercise restraint on decisions about investment, employment and consumption. Even if the foreign policy and geopolitical uncertainties will likely not diminish for the foreseeable future, the projects of the future governing coalition that are currently being discussed could trigger stabilising expectations and greater planning security for households and commerce.
Increased uncertainty impacting global economic outlook
Latest figures show a robust global industrial economy. In December it picked up momentum – both in emerging and industrialised economies – at +0.8% compared with November, following a more restrained expansion in the preceding months. As a result, it was 2.5% up in year-on-year terms at the end of 2024. The leading indicators for global development in output currently reflect the significant rise in uncertainty in the light of a potential international trade war. The S&P Global Purchasing Managers’ Index dropped further in February, by 0.3 points to 51.5. This means it is continuing to signal slight growth, but somewhat less growth than the month before. Whilst the index in the services sector softened to 51.6 points, industrial sentiment improved further, with a rise of 0.5 points to 50.6. However, the firmer development in industry is probably due at least in part to temporary advance-purchasing effects relating to the announced increases in U.S. tariffs. The SENTIX sentiment index for the global economy, which reflects the mood amongst investors, also saw a fall in March; both expectations and the assessment of the current situation were down. The decline in the overall index conceals highly divergent regional developments: whilst the mood amongst financial market players in Europe leapt upwards in response to the announcement of higher public spending, the SENTIX index for the U.S. saw a greater slump than at any time since the 2008 global financial crisis. The U.S. Administration’s erratic trade policy is creating great uncertainty and volatility on the financial markets.
Global trade in goods has continued its upward trend. It expanded by 1.1% from November to December in seasonally adjusted terms. In year-on-year terms, it was 3.3% higher. The RWI/ISL Container Throughput Index suggests that global trade is likely to continue its expansion in early 2025, despite the increased uncertainties about trade policy. In January, the RWI/ISL Index made up for its fall in the preceding month, rising from 128.9 to 133.1 points, and there was a particularly strong increase in the Nordrange Index for European ports, of +4.8 to 110.9 points. Overall, however, container throughput has been flat since summer 2024.
Generally, forecasts of the global economic development are currently being revised downwards in view of the increased geopolitical and trade policy uncertainty and an expected cooling-off of the growth rate in the U.S.
Another substantial fall in the foreign trade surplus in January
German exports are still not picking up at the beginning of the new year. Following an increase of 1.3% in December, adjusted for seasonal factors and calendar irregularities, there was a clear fall of 4.5% in nominal exports of goods and services from December to January. In the less volatile three-month comparison, however, they were still 0.3% up. Less was shipped out particularly to other EU countries (-4.2%), but also to the rest of the world (-0.4%) in January than in December; exports to the U.S. also declined further in that period, by -4.2%. Nominal imports of goods and services also recorded a weak development after adjustment for seasonal factors and calendar irregularities, of -0.5% between December and January, but in the three-month comparison they expanded by 1.6%. As exports fell by more than imports, the (seasonally adjusted) monthly trade surplus dropped from €11.3 billion to €5.2 billion, thus reaching the lowest level since the end of 2022. It is likely that the surplus vis-à-vis the U.S. also diminished in January, given falling exports of goods and significantly rising imports of goods (+6.5% month-on-month).
Import prices rose by 1.1% (seasonally adjusted) between December and January. Export prices rose somewhat less strongly, by +0.4%, so that the terms of trade deteriorated by 0.7% in that period. In real terms, the decline in exports is therefore likely to have been somewhat greater, and imports are only likely to have seen a slight increase in real terms.
The leading indicators are continuing to signal no sustained pick-up in exports. New foreign orders fell by 2.3% (seasonally adjusted) in January compared with the previous month; particularly striking was a further softening of foreign demand for capital goods (-3.2%). The sharp slump in November meant that foreign orders were actually as much as 7.3% down in the three-month comparison. The ifo export expectations saw their first improvement since November 2024 in February, despite the increased uncertainty about international trade policy (from -7.1 to -5.0 points), not least because the export outlook in the important automotive sector brightened. Overall, however, the manufacturing industry is expected to see a further decline in foreign sales.
The export industry is continuing to suffer from the weak order situation; also, the erratic U.S. trade policy is increasingly impacting both short-term and long-term business planning by the companies. The January data did not show any obvious forward-purchasing effects in U.S. business. Following the clear decline in exports in the final quarter of 2024, there are signs of ongoing uncertainty for German exporters.
Industrial output up, but no turnaround currently in sight
The goods-producing sector was able to expand its output by 2.0% (adjusted for price, seasonal and calendar variations) between December and January. The December figure (revised slightly upwards) had seen a drop of 1.5%. In industry, output rose appreciably, by +2.6%, whilst the expansion was weak in the construction sector, and there was a slight contraction of -0.5% in the energy sector.
Within industry, the individual sectors saw very differing developments in January. Clear falls were reported by “other vehicle manufacturing” (-12.2%), which has tended to be dominated by large orders, and the manufacturers of metal products (-7.7%). The production of pharmaceuticals (-5.3%) as well as the production of data processing equipment, electrical and optical products (-2.5%) also declined. In contrast, there were substantial increases in the repair and installation of machinery (+15.6%) and in the sector of cars and car parts (+6.4%). There was also a clear increase in the manufacture of chemical products (+5.6%), and the important sector of mechanical engineering also expanded slightly (+1.0%).
In the less volatile and thus more meaningful three-month comparison, output in the goods-producing sector was flat in January. Whilst industrial output dropped by 0.8%, construction expanded by 1.0%, and energy production also increased appreciably, by +5.5%.
There was a setback in the volume of new manufacturing orders at the beginning of the year. They contracted by 7.0% in price-, calendar- and seasonally adjusted terms between December and January, following a 5.9% rise in December. Domestic orders in particular were significantly lower, by 13.2%, in January; however, December had seen a sharp expansion of 14.0% due to large orders. Foreign orders saw a comparatively small decline, of 2.3%, in January. Adjusted for large orders, the total order volume fell by 2.7% compared to the preceding month.
The less volatile and thus more meaningful two-month comparison shows a fall of 2.4% in new manufacturing orders. Here, a clear increase of 5.8% in domestic orders contrasted with a sharp drop of 7.3% in foreign orders.
In the goods-producing sector as a whole, no cyclical recovery can yet be seen, even if some previous production falls were offset at the beginning of the year. Business sentiment has improved slightly, according to the ifo Business Climate and S&P Global, but it remains at a low level. In view of the clear fall in new orders seen recently, no sustainable pick-up in industrial output is in sight.
Retail turnover slightly up; leading indicators mixed
Price-adjusted retail turnover (excluding motor vehicles) rose slightly by 0.3% in January (month-on-month). Year-on-year, the retail sector experienced real sales growth of 3.0% in January. Trade in foodstuffs expanded slightly in January (+1.6%). Online and mail-order trade shrank by 3.8%. In year-on-year terms, however, it increased by 12.0%.
Total new car registrations declined in February by -6.8% (month-on-month) and -6.4% (year-on-year). In the more meaningful three-month comparison, new registrations declined by 4.2% compared to the previous period. New car registrations by private individuals were clearly down, by 9.6%, in February compared to the previous month. In the three-month comparison, the figures were down by 2.8%. New car registrations by companies and self-employed individuals fell by 5.3% in February. The hotel, restaurant and catering industry registered a slight nominal increase in turnover of 0.6%; adjusted for inflation, it fell by 2.6%. In December 2024, the sector’s nominal sales had been 2.2% down on November, adjusted for seasonal fluctuations and calendar irregularities. Turnover dropped by 0.2% compared with December 2023.
The ifo Business Climate index for the retail trade (incl. vehicles) rose by 1.5 points to 23.8 points in December, but overall has stagnated since mid-2024 at a low level. The assessment of the current situation brightened slightly by 0.4 points to 13.4. Expectations rose by 2.6 to -33.5 points. According to an ifo survey, retail firms are planning further price rises: price expectations rose for the fifth time in succession to reach 33.2 points.
For February, the GfK market researchers registered a decline in consumer sentiment of 1.2 points to -22.6 points. According to the institute, the latest figures were driven by a deterioration in income expectations and the propensity to purchase. Also, the tendency to save money increased. According to the GfK forecast, consumer sentiment will drop further in March by 2.1 points to 24.7 points. In contrast, the HDE Consumer Barometer brightened a little in February following a weak start to the year.
Despite substantial real wage rises of 3.1% in 2024, leading indicators do not currently suggest a turnaround. Worries about job security and persisting geopolitical uncertainties mean less planning security and a reduced inclination to purchase on the part of consumers.
Inflation rate stuck at 2.3%
The rise in consumer prices remains close to the monetary policy target of 2%. The rate of inflation (year-on-year rise in the price level) was flat at +2.3% in February. Compared with the preceding month, consumer prices increased by 0.4%. On the one hand, prices for foodstuffs rose clearly in February, up 2.4% in year-on-year terms. On the other hand, energy prices were down by another 1.6% in February compared with a year previously, reducing the inflation rate. The core inflation rate (without energy and food) fell further by 0.2 percentage points, reaching +2.7%. This was due not least to somewhat less price pressure in the field of services, of +3.8%, although this figure remained higher than the average.
The prices in the upstream stages of the economy are developing increasingly dynamically, but are still not feeding through into a higher inflation rate. Producer prices in January rose by 0.5% year-on-year and fell by 0.1% month-on-month. Import prices rose by 1.1% between December and January, leaving them 3.1% up in year-on-year terms. Wholesale prices in February rose by 0.6% (month-on-month) and 1.6% (year-on-year).
Gas spot market prices rose appreciably over the year: latest figures show the TTF Base Load at around €42/MWh, almost 62% higher than the previous year’s level. However, it was down by 24% compared with the preceding month. Market expectations point to gas prices remaining a little over €40/MWh in the coming quarters. The price for Brent crude oil recently stood at approx. €65/bl, almost 11% below the previous month’s level, and 17% down on the year before.
Partly due to administrative price increases, such as the rise in carbon pricing, the increase in the price of posting a letter, and the higher cost of the Deutschlandticket, the inflation rate is likely to continue to hover above the 2% mark in the coming months. Later in the year, inflation-reducing factors – such as the moderate price development in the upstream economy, the aftereffects of the restrictive monetary policy, and lower collective wage agreements – are likely to gain the upper hand.
Labour market remains sluggish at the beginning of the year
The development on the labour market remains weak at the beginning of the year. Unemployment did not reach the 3 million mark in February, but it did rise by 5,000 people (seasonally adjusted). At the same time, underemployment increased slightly, by 2,000 people (seasonally adjusted). Employment fell somewhat more strongly than is usual at the beginning of the year, by 11,000 people in January (seasonally adjusted). Employment subject to social security contributions grew by 12,000 people in December (seasonally adjusted), thus almost entirely offsetting the fall in employment seen in November. Actual short-time work in December was again much higher in year-on-year terms, at 222,000 people, but the previous month’s figure was again revised substantially downwards (-31,000 people). In view of a stabilisation of the notifications of short-time work, therefore, it looks likely that the sharp rise feared in the autumn will not take place for the time being.
The leading indicators are suggestive of a restrained development on the labour market. The IAB labour market barometer has fallen to 98.3 points; not only the unemployment component continued its downward trend, but also the expected employment development dropped just below the expansion threshold for the first time since the COVID-19 pandemic. The ifo employment barometer also softened following a rise in the previous month, due to a renewed fall in the propensity to recruit in the services sector. At the same time, the number of vacancies reported to the Federal Employment Agency is indicative of generally declining demand for labour. In view of a lack of cyclical stimuli, therefore, the expected spring recovery on the labour market will likely be restrained.
Company insolvencies up significantly in 2024
In December 2024, the number of corporate insolvencies (1,791) stood at the level of the preceding month of November (1,787), but was 15.5% up year-on-year. In 2024, there was a total of 21,812 corporate insolvencies, corresponding to a rise of 22.4% over 2023, and nearly 50% over 2022. It is the highest annual figure since 2015. Whilst the number of employees affected by insolvency rose at a double-digit rate in the monthly and annual comparison (December vs. November: 30.1%; 2024 vs. 2023: 11.2%), the rise in likely claims was three-digit (December vs. November: 110.4%; 2024 vs. 2023: 118.4%). Various factors lie behind the increase in company insolvencies, such as the restrained macroeconomic development, structural challenges, increased costs and repercussions from the previous crises (e.g. pent-up effects from the time of the special arrangements during the COVID years).
Compared with the official statistics, the IWH Bankruptcy Update for individuals and corporations applies a more rigorous methodology and is more up to date; for February, it registers 1,436 insolvencies, a rise of 7.0% (month-on-month) and 20.1% (year-on-year). 18,839 employees were affected, up 52% on February 2024. Going by leading indicators, the IWH believes that it is feasible that the phase of rising insolvency numbers may be over for the time being. For March and April, constant or slightly falling numbers of insolvencies are expected.
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[1] This report is based on data that were available as of 14 March 2025. 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.
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