Will the German Economy Recover in 2025?

Germany, which was considered the economic engine of the European Union (EU) till very recently, now seems to have its gears grinding. Being the EU’s largest economy, the German economy’s health impacts that of the entire Eurozone. With elections done and dusted, the biggest challenge the 21st Bundestag (German parliament) faces is reasserting the country’s dominance in Europe. Economic and political upheaval results in high market uncertainty. Understanding how these factors influence the DE 40 (DAX 40), STOXX 50 and the euro is critical to refining your trading strategy and making informed decisions.

New Government Inherits Stagnated Growth

The world’s fourth-largest economy had a turbulent 2024, economically and politically. High uncertainty kept markets volatile and investor sentiment fear-driven.

While the German economy had not grown since 2019, it contracted by  0.3% in 2023 and 0.2% in 2024. The slowing economy resulted in a rise in the unemployment rate, which reached 3.4% in 2024. About 20.9% of the country’s population was at risk of poverty and social exclusion that year. That is despite Germany being one of the wealthiest nations in terms of GDP per capita.

Before the Russia-Ukraine conflict began, one-third of Germany’s primary energy supply came from Russia. Consequently, the country was severely hit by sanctions against Russia. High uncertainty and weak demand (domestic and foreign) for manufactured goods, along with elevated energy prices, weighed heavily on investor sentiment. China’s export-oriented industrial policy accompanied this, making Germany compete for share in the global solar panel, auto and EV markets. Unfortunately, the German factories had idled more production lines than the rest of the EU combined in 2024.

On the political front, domestic and EU elections contributed to market uncertainty. The uncertainty escalated in November 2024, due to the collapse of Chancellor Olaf Scholz’s coalition. Forced by circumstances, the country held early elections in February 2025.

However, all wasn’t gloom and doom. The general government deficit declined from 2.6% of the GDP in 2023 to 2.2% in 2024 and is expected to fall further to 1.8% in 2026. In the second quarter of 2024, real wages increased by 2.3% y-o-y. Germany has also maintained a trade surplus with the US for years. In 2024, the country had a trade surplus of €69.9 billion, mainly through motor vehicle, machinery and chemical product exports. 

New Government Plans to Break Out of Stagnation

On March 5, 2024, Friedrich Merz’s “whatever it takes” stance struck a strong positive chord with investors, turning the sentiment bullish. The then chancellor-in-waiting took a U-turn from debt break and pledged to ease government spending. The incoming leader announced an infrastructure development fund worth €500 billion while ramping up defence spending. The allowed state structural deficit was also announced to be raised to 0.35% of the GDP, from the previous 0.0%.

The announcement significantly impacted the growth forecasts for the economy, as several analysts revised their outlook upwards. Bank of America considers this a “game changer” and estimates that it will drive Germany’s GDP growth to 0.8% in 2025. ABN Amro Bank also raised its growth forecast to 0.5%  on concluding that the fiscal input will boost growth by 0.1 pp in 2025. The bank also raised its Eurozone forecast by 0.1 pp to 1.2% for 2025. This emphasises that the metaphor, “When Germany sneezes, Europe catches a cold” (and when it thrives, so does the EU) holds merit.

However, the country remains under the lens of the Trump administration due to the massive trade surplus. The trade war is set to severely impact the German economy. So much so that the country faces a third consecutive year of contraction. With these headwinds, the Bundestag plans to form a coalition government as Conservatives and centre-left Social Democrats join forces to super-charge growth together.

Trading the German Policy U-Turn

Although the DE 40 surged through the first quarter of 2025, it had plummeted about 107 points YTD by April 9. This was after tariff and counter-tariff announcements hurt investor sentiment. The STOXX 50 had also declined nearly 5% YTD by the first week of April. 

With the uncertainty around the US policies ending, and the announced U-turn, investors remain cautious as German manufacturers search for export markets. 

However, the EUR has climbed 6.5% YTD, thanks to the bearish sentiment regarding the greenback due to the tariffs. The euro is also supported by speculations of the coalition government’s targets to prevent GDP erosion.

Notably, the execution of the policy requires a two-thirds majority of the Bundestag. The government’s stance will be clear only after the new chancellor is sworn in and holds the parliamentary voting.

While government’s policies play a critical role, several other factors contribute the movement of DAX 40, STOXX 50 and EUR/USD. Considering these factors is crucial for effectively trading German and EU assets:

• Release dates of the German fiscal stimulus
• ECB’s interest rate policy
• US’s trade tariffs
• China’s export share
• Translation of defence spending into manufacturing industry stimulus

These factors will continue to move EU and German markets’ volatility and generating trading opportunities.

Navigating Market Uncertainties

Traders popularly use derivative instruments, such as contracts for difference (CFDs), to navigate uncertain markets. This is because CFDs enable them to explore opportunities in both bullish and bearish markets. CFDs can be used for trading indices as well as forex. Plus, these instruments are traded on margin. Using leverage amplifies traders’ purchasing power. However, it also amplifies potential losses and profits. Hence, robust risk management is critical while trading CFDs. Trading with limit orders, such as stop loss and take profit, can potentially contain losses within risk limits, if the markets move against your speculation. 

To Sum Up

• The German economy had stagnated since 2019.
• The incoming government announced major changes in the fiscal policy.
• Policy changes fuelled bullish investor sentiment and improved analyst forecasts.
• The ECB’s interest rates and the US’s tariffs bring uncertainty to the performance of the DE 40, STOXX 50 and EUR/USD.
• CFDs are a popular way to trade uncertain markets.
• Risk management is essential when trading with CFDs. 

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