German economic output rose significantly in the fourth quarter of 2025, according to the Monthly Report. According to the Federal Statistical Office’s flash estimate, real GDP rose by 0.3 % on the quarter after seasonal adjustment. Economic activity thus resumed the upward movement that had begun at the end of 2024, the Bundesbank’s experts write. It was interrupted in the third quarter of 2025 mainly by the negative impact of US trade policy.Growth towards the end of the year was primarily driven by private and government consumption. Industry grew its production and construction output rose significantly. 

Experts see the economy continuing to recover in the first quarter of 2026, albeit with weak momentum. Industry and exports are set to grow in the current quarter, the Monthly Report states. Despite some recent negative signals concerning the short-term outlook for production plans and capacity utilisation, the ifo Institute reports that the business situation in the manufacturing sector improved in January, suggesting that industry will continue to recover. A potential reason is that industrial firms’ demand situation is visibly brightening. By contrast, initial available indicators point to private consumption potentially weakening again.

No turnaround in the labour market

The labour market remained stuck sideways in the final quarter of 2025, the experts explain. The number of persons in employment fell slightly by 25,000, while the unemployment rate held steady at 6.3 %. A look at the leading indicators shows next to no promise of a short-term improvement in the labour market.

The structural change which is buffeting Germany’s industrial sector in particular is simultaneously leading to staffing cuts and a shortage of skilled workers, according to the Monthly Report, with considerable shifts occurring not only between sectors, but also between occupations. For example, the share of people employed in traditional production occupations in the manufacturing sector has been declining markedly, demand for employees with higher professional qualifications and skillsets or in new occupational fields is tending to increase. Now, as well as in the years to come, retirement numbers are and will be particularly high due to generational change, allowing firms to reduce staff without having to resort to lay-offs for operational reasons. This is likely to be one of the reasons why unemployment has risen only moderately over the past three years, despite considerable structural challenges and protracted economic weakness, and at the same time there is a considerable shortage of skilled workers, the experts conclude.

Wage growth no longer quite as strong for 2025 as a whole

Wages were up significantly in the fourth quarter of 2025, but rose less sharply in 2025 as a whole than in the previous two years. In 2026, the experts estimate that new wage agreements are likely to be moderate, as the macroeconomic environment is improving only gradually. The 2026 wage round is larger than in the previous year and affects around 11 million employees, according to the report. 

Inflation rate around 2 % at turn of year

Consumer prices as measured by the Harmonised Index of Consumer Prices (HICP) rose somewhat more slowly in the last quarter of 2025 than previously. Services prices, which are already dynamic – especially those for travel services – surged further. By contrast, the annual average inflation rate fell from 2.5 % in 2024 to 2.3 % in 2025. Consumer prices rose considerably as the year 2026 began, driven by, amongst other things, energy prices, primarily higher fuel prices. Prices for services likewise rose, though. The increase in the price of the Deutschland-Ticket was a notable factor here. Over the next few months, the inflation rate is likely to hover around the 2 % mark, the experts write.