Economic output in Germany was up in the first quarter of 2025, the Bundesbank writes in its latest Monthly Report. According to the Federal Statistical Office’s flash estimate, real gross domestic product (GDP) was up by 0.2 % on the quarter after seasonal adjustment. Averaged over the first quarter, industrial output rose significantly on the previous quarter, after having been declining almost continuously for nearly two years. This is likely to have been attributable to a somewhat improved order situation and anticipatory effects stemming from announcements that the US administration would raise tariffs. These effects likewise contributed to a significant increase in exports of goods. Last but not least, consumers probably sometimes used the sharp rise in wages last year for additional consumption.

Not much movement in the labour market

Unemployment rose moderately in the first quarter of 2025, the report states. On average in the first three months of 2025, a seasonally adjusted 2.9 million people were registered as unemployed, which is around 38,000 more than in the final quarter of 2024. This corresponds to an unemployment rate of 6.2 %. Given various indicators for the labour market, the economists still see the outlook as subdued, at least in the short term.

Inflation rate slightly higher again in first quarter

In the first quarter of 2025, consumer prices as measured by the Harmonised Index of Consumer Prices (HICP) rose by a seasonally adjusted 0.7 % on the quarter. Services were the main driver. This was partly because of the distinct price rise for the “Deutschland-Ticket”. In addition, energy prices rose again, especially fuel prices. Annual inflation (HICP) rose slightly to 2.6 % in the first quarter, compared with 2.5 % in the fourth quarter of 2024. Core inflation excluding energy and food remained unchanged at 3.2 %. The Bundesbank’s economists write that the inflation outlook is particularly uncertain at present. Inflation is currently expected to fluctuate around the 2 % mark in the coming months.

The German economy could more or less stagnate in the second quarter

The Bundesbank expects the economy to more or less tread water in the second quarter. The economists write that a wide range of burdens persist and the US administration’s tightening of its tariff policy is adding additional headwinds. This has a particular impact on the export industry, which is already struggling with a difficult competitive position and weak demand. In addition, not only tariffs but also the appreciation of the euro associated with financial market responses to US trade policy weighed on exports. 

The uncertainty associated with the tariff conflict also affects planning certainty and thus firms’ propensity to invest. Private consumption could once again provide some impetus. In view of the weak labour market outlook and declining wage growth, labour income is not expected to provide any support in the short term. However, according to surveys conducted by the market research institute GfK, consumer sentiment brightened in April, accompanied by a significant decline in the propensity to save.

Plans by the new Federal Government could strengthen long-term growth

The new Federal Government’s coalition agreement contains supply-side projects aimed at strengthening the German economy’s long-term growth, the economists write. This is particularly true of measures to improve the business investment environment. These include projects to reduce bureaucracy or the planned tax incentives for investment.

According to the Bundesbank, a coherent overall concept has yet to be drawn up for the energy transition. Energy transition costs can be limited through efficiency-enhancing measures and market-based mechanisms, the Monthly Report states. Some of the new government’s plans are aimed in this direction. For example, it is planned to make greater use of the cost-effective overhead lines when expanding the grid. There is a less compelling case for subsidies such as usage fees or the industrial electricity price, however. It also seems to make sense to focus on market incentive mechanisms in the case of decarbonisation. For efficient price incentives, however, there would have to be efforts at the EU level to ensure that carbon pricing is applied to all sectors as equally as possible and without exception, the economists write.

According to the Bundesbank, there is some catching-up to do in drawing up plans to strengthen the labour supply. While individual measures such as the planned civic allowance reform are likely to boost the labour supply, domestic reserves remain largely uptapped. Measures to mobilise labour market reserves for older people, for example, or to increase female labour force participation are lacking. Furthermore, significant rises in social security contributions threaten to thwart incentives to work (and – through higher labour costs – to burden the competitiveness of the German export industry), according to the Monthly Report.