EXPLAINER – How Germany’s economic engine stalled

• Weakening exports, automotive losses, unemployment and insolvencies expose structural crisis
• Economic anxiety is spreading among Germans, including fears for job safety and financial difficulties

Germany’s economy has barely expanded since 2020, raising concerns over the deterioration of Europe’s former growth engine.

Although Germany emerged from two years of recession in 2025, gross domestic product (GDP) grew 0.2%, too little to offset the preceding downturn.

The GDP rebounded 3.7% in 2021 and 1.4% in 2022 following the 4.1% pandemic contraction in 2020. Output then fell 0.9% in 2023 and 0.5% in 2024.

The economy grew 0.4% quarter-on-quarter in the first three months of 2026 and 0.2% in the second quarter. Investment declined in April-June, showing the expansion was not broad-based.

The European Commission expects growth of just 0.6% in 2026 and 0.9% in 2027, while the Bundesbank projects 0.5% this year.

Industrial decline at heart of stagnation

Germany’s economic model was built on manufacturing that transformed inexpensive imported energy into high-value vehicles, machinery and chemicals.

That model is under pressure from the loss of cheap Russian pipeline gas, elevated energy and labor costs, weak investment and Chinese competition in world markets.

Industrial production rose only 0.2% month-on-month in June, following years of declining production.

Manufacturing employed 5.29 million people at the end of the first half, down 144,100, or 2.7%, year-on-year.

Employment fell 3.8% in fabricated metal products, 3.7% in basic metals, 3.6% in chemicals and 3.4% in electrical equipment. Mechanical engineering reduced its workforce by 2.7%.

Automotive industry bears brunt of crisis

Germany’s automotive industry provides the clearest evidence of the structural downturn.

Sector employment fell by 42,300, or 5.8%, to 691,500 at the end of the first half, its lowest level since 2005 and the largest decline among major industrial sectors.

Employment among vehicle and engine manufacturers dropped 6.1% to 429,200, while parts and accessories suppliers recorded a 7.6% decline to 219,500.

Revenue at Volkswagen Group was almost unchanged at €158.1 billion ($184 billion), while operating profit declined 11.6% to €5.9 billion and its margin narrowed to 3.8%.

BMW’s pre-tax profit fell 29.4% to about €4 billion. Net profit declined 28.5% to €2.87 billion, and its automotive margin dropped to 3.6% from 6.2%.

Adjusted operating profit at Mercedes-Benz Group fell 10% to €4.07 billion, net profit dropped 6% to €2.52 billion and industrial free cash flow contracted 30% to about €3 billion.

Porsche’s revenue fell 5.1% to €17.23 billion.

Profitability remained below earlier levels amid tariffs, restructuring costs and weak Chinese demand.

The results show the downturn extends beyond suppliers. Flagship automakers are selling fewer vehicles and operating with narrower margins as competition, tariffs and domestic costs erode earnings.

The electric-vehicle transition adds pressure because electric models require fewer mechanical components, threatening suppliers dependent on engines, transmissions and exhaust systems.

Export model loses strength

Germany has traditionally relied on trade surpluses to compensate for weak domestic demand, but that source of growth is becoming less dependable.

Exports fell 0.3% in 2025, their third consecutive annual decline, reflecting weaker foreign demand, US tariffs and Chinese competition.

Exports improved 3.7% year-on-year in the first half of 2026, but imports rose faster at 4.4%.

In June, exports increased 0.9% to €139.3 billion, while imports surged 4.4% to €123.9 billion, narrowing the monthly trade surplus to €15.4 billion.

The commission expects exports to stagnate and the current-account surplus to fall from 4.7% of GDP in 2025 to 3.1% in 2027.

Labor market begins to weaken

Germany’s labor market initially resisted the downturn as companies retained skilled workers and employment grew in public services. That resilience is fading.

Unemployment rose by 71,000 to 3.007 million in July, taking the rate to 6.4%, according to the Federal Employment Agency. Seasonally adjusted unemployment increased by 6,000.

Employment declined by 23,000 in June and was 225,000 lower than a year earlier. The agency said labor demand remained weak.

Business insolvencies remain elevated

Corporate insolvencies have risen as companies struggle with weak demand, high financing and energy costs, and the withdrawal of pandemic support.

Courts recorded 1,995 business insolvencies in May, 2% fewer than a year earlier. However, insolvencies increased 4.9% to 10,546 in January-May.

Germany registered 24,064 corporate insolvencies in 2025, the highest total since 2014, following increases of more than 20% in both 2023 and 2024.

Germany plans higher infrastructure and defense spending, but bureaucracy, labor shortages and slow planning could limit the effect.

The country is no longer technically in recession, but marginal growth conceals deeper weaknesses. Industrial employment is falling, automakers face shrinking margins, exports have lost momentum and insolvencies remain elevated.

Economic anxiety spreads among Germans

The economic deterioration is increasingly shaping public sentiment, according to the ARD-DeutschlandTREND survey for July.

More than three-quarters of Germans said they were worried about the country’s economic competitiveness, with concern higher than last autumn.

Almost one in four employed respondents feared losing their job, while more than half of workers worried they could face financial difficulties in retirement.

The economic concerns have also weighed on the government. Only 13% of eligible voters said they were satisfied with its performance, while Chancellor Friedrich Merz’s approval fell to 13%, according to the representative survey commissioned by ARD, and public confidence continues to deteriorate further.