Non-final working translation

The global economy expanded moderately again in the final quarter of 2025, and global trade in goods continued to increase. In the United States, robust overall economic growth appears to have continued. In China, activity remained subdued. Economic output in the euro area rose again moderately. Global trade continued to increase. At the same time, regional changes became entrenched: US goods imports fell due to higher tariffs, while exports from China and some small Asian countries rose significantly again. Overall, the global economy continued to prove resilient.

Trade policy tensions and geopolitical risks persisted. The United States maintained its aggressive trade stance. At the same time, the European Commission stepped up its efforts to deepen economic ties with other trading partners, concluding negotiations on trade and investment agreements with India and the Mercosur countries. These agreements highlight the EU’s efforts to diversify its trade relations. They could also send an important political signal in support of open markets and rules-based trade in an increasingly fragmented global environment. However, the referral of the Mercosur Agreement to the European Court of Justice by the European Parliament has called this signal into question.

Against the backdrop of heightened geopolitical risks, commodity prices have recently picked up on a broad front. Amid tensions in Iran and production disruptions in Kazakhstan, crude oil prices climbed to $71 per barrel most recently, following a decline that lasted through to the end of 2025. European gas prices also increased somewhat at times. This was mainly due to a weather-related increase in demand. Prices for industrial raw materials rose particularly sharply recently. In addition to supply disruptions, a rise in precautionary demand in the wake of geopolitical tensions also had an inflationary effect.

The disinflation process in the advanced economies regained momentum in recent months. . Year-on-year consumer price inflation fell from 3.0 % in September to 2.3 % in January. This was mainly due to the decline in core inflation (excluding energy and food) to 2.4 %. This primarily reflects developments in the United States, where tariff-related price pressure on goods stalled and services inflation eased noticeably. In the euro area, by contrast, disinflation in services has progressed only slowly of late. The rise in commodity prices since the start of the year may make a further decline in inflation rates in the advanced economies more difficult in the coming months. 

Favourable economic signals and robust risk appetite prevailed on the financial markets, overshadowed at times by fears of an overvaluation of the US equity market and geopolitical risks. Favourable economic data from both sides of the Atlantic, for instance regarding the US labour market, reinforced expectations of robust global economic growth.The economic optimism boosted the yields on ten-year US Treasuries and Bunds right into January. Long-term government bond yields in Japan rose particularly sharply.However, the macroeconomic environment was less of a contributing factor than fears of an easing of budgetary discipline there. The major indices on the international equity markets were supported by robust risk appetite and achieved record highs once emerging concerns about an “AI bubble” had receded again by the end of the year.

In the new year, however, geopolitical risks then came to the fore. Uncertainty arose in January about possible new US tariffs against European countries due to the US claim to Greenland. This led to market participants perceiving greater risks to growth, particularly in the United States, which in turn weighed on confidence in the US dollar. At the same time, the US dollar depreciated, the yields on US Treasuries rose and equity prices fell worldwide – an interplay of asset price changes that was recently also referred to as “debasement trade”. The response pattern corresponded to the market responses following the extensive global tariff announcements by the US administration at the beginning of April 2025, albeit to a muted extent. The price of gold also rose significantly. Given that the Greenland conflict ultimately did not escalate and the United States withdrew its tariff threat, the equity markets subsequently recovered, although geopolitical uncertainty remained high. This increased demand for comparatively safe investments in particular towards the end of the reporting period and primarily weighed on ten-year US Treasuries yields.The euro recorded a slight appreciation on balance against the US dollar.

The ECB Governing Council kept the key interest rates unchanged at its monetary policy meetings in December 2025 and February 2026. The deposit facility rate, through which the Governing Council steers the monetary policy stance, continues to stand at 2 %. According to the baseline of Eurosystem projections from December, headline inflation is expected to average 1.9 % in 2026, 1.8 % in 2027 and 2.0 % in 2028. 

Monetary dynamics in the euro area gathered pace in the fourth quarter of 2025. Households and non-financial corporations continued to display a strong preference for liquid assets. In addition, financial corporations greatly increased their short-term bank deposits compared with the previous quarters. In part, this was how these institutional investors responded to the spike in uncertainty in financial markets surrounding the earnings outlook in technology and Al-related investment sectors. But because the inflow to M3 was similar to that of the same quarter of the previous year, the annual growth rate of the broad monetary aggregate M3, at 2.8 %, moved sideways at the end of December. 

Loans to euro area non-financial corporations and households recovered further, buoyed by brisker investment activity and improved housing market prospects. The Bank Lending Survey (BLS) found that banks had tightened their credit standards on average for loans to enterprises as well as for consumer credit and other lending in the fourth quarter. The tightening of credit standards for loans to enterprises, however, was limited to a small number of Member States, including Germany, with mostly large firms being affected. In addition to loans to the private non-financial sector, banks also significantly expanded their lending to financial corporations which, for their part, use a portion of their total assets to finance domestic enterprises and general government.

The German economy closed the year 2025 with significant gains. According to the Federal Statistical Office’s flash estimate, real GDP grew by 0.3 % on the quarter after seasonal adjustment. Growth towards the end of 2025 was mainly driven by private and government consumption. Households probably took advantage of the greater scope for expenditure afforded by strong wage growth. This also gave a boost to consumer-related service providers. The high US tariffs and the strong euro compared with the US dollar are likely to have continued to dampen exports somewhat. Against the backdrop of increasing domestic demand, however, industry was able to regain its footing somewhat. Industrial production increased and sales rose slightly. Despite the continued underutilisation of capacity in industry, investment in machinery and equipment is also likely to have increased. Demand for construction work, which has been pointing upwards for some time now, is probably also being reflected in rising construction investment. Construction output was also supported by favourable weather conditions in December for the time of year.

German banks’ lending business with enterprises and households slowed in the fourth quarter of 2025. This was because loans to non-financial corporations declined on balance following a marked increase in the previous quarter. Weak lending in this segment reflects a macroeconomic environment that remains challenging. This is consistent with the BLS finding that banks in Germany tightened their credit standards again in the fourth quarter of 2025, mainly because their risk tolerance decreased and credit risk increased. Despite somewhat more restrictive lending policies, loans to households for house purchase continued the recovery seen since the third quarter of 2024. The strong growth in real household incomes and a more upbeat assessment of housing market prospects boosted demand for such loans. 

The labour market remained stuck sideways in the final quarter of 2025, too. Employment declined slightly in the fourth quarter. Overall, however, employment levels remain high, though the situation remains very diverse across economic sectors. The unemployment rate remained unchanged. Leading indicators give no promise of any short-term improvement in the subdued rate of labour market growth. 

The comparatively stable number of employees subject to social security contributions obscures considerable shifts. The structural change which is buffeting Germany’s industrial sector in particular is simultaneously leading to staffing cuts and a shortage of skilled workers, with considerable shifts occurring not only between sectors, but also between occupations. 

Negotiated wages saw a strong increase in the fourth quarter. Including ancillary agreements, they went up by 3.4 % on the year in the third quarter. They were dampened somewhat by one-off effects. In the fourth quarter, basic rates of pay continued to rise somewhat more steeply, at 4.0 %, albeit less sharply than in the summer quarter (5.0 %). Trade unions’ recent wage demands for various sectors are currently slightly lower than in the previous year. As the macroeconomic environment is likely to improve only gradually, new wage agreements are likely to be moderate.

Actual earnings are likely to have risen sharply in the fourth quarter. This is indicated by the Federal Statistical Office’s earnings survey, according to which nominal wages rose more strongly than negotiated wages over the October to December period. In 2025 as a whole, for which, unlike the fourth quarter, provisional figures from the Federal Statistical Office are already available, wages rose less sharply than in previous years. Actual earnings accordingly rose by 4.6 % on the year, compared with 5.2 % in 2024. 

Consumer prices (HICP) rose somewhat more sharply in the fourth quarter than in the previous two quarters. On average across the months of October to December 2025, consumer prices increased by a seasonally adjusted 0.6 %, compared with 0.5 % in the two preceding quarters. Services prices, which are already dynamic, surged further. By contrast, non-energy industrial goods inflation came to a near-standstill. This may reflect the lagged effect of the appreciation of the euro in the first half of 2025. Food price dynamics also declined significantly in the closing quarter of 2025 owing to lower commodity prices. Energy prices broadly stagnated in the fourth quarter of 2025, despite falling crude oil prices compared with the previous quarter. The annual headline inflation rate rose from 2.1 % in the third quarter to 2.3 % in the fourth quarter of 2025, supported by base effects from the previous year. Core inflation (excluding energy and food) even rose significantly, from 2.4 % to 2.7 %.

On an annual average in 2025, the inflation rate fell to 2.3 %, from 2.5 % in 2024. Services price inflation came down a little, yet remained markedly elevated. Unit labour costs have been rising somewhat less sharply, which may be one factor among several. Non-energy industrial product inflation also continued to decelerate, to which a stronger euro contributed in part. By contrast, energy prices fell again due to lower commodity prices, albeit somewhat less sharply than in the previous year. Food price inflation was roughly in line with the previous year’s figure and thus the historical average. The more restrictive monetary policy of previous years continued to have a dampening effect on the inflation rate in 2025.

The inflation rate rose slightly from 2.0 % in December to 2.1 % in January. By contrast, the core rate fell slightly from 2.5 % to 2.4 %. A number of government measures had an impact. In the case of energy prices, price-driving effects from the increase in the carbon price as part of the national emissions trading scheme and from stricter requirements for reducing the greenhouse gas (GHG) ratio outweighed the dampening impact of lower transmission grid fees and the abolition of the natural gas storage levy. As regards services, the increase in the price of the “Deutschland-Ticket” from €58 to €63 had an impact. By contrast, the reduction in the VAT rate on food and beverage service activities did not lead to lower prices. 

Over the next few months, the inflation rate is likely to hover around the 2 % mark. Core inflation is likely to initially remain elevated because services prices will continue to rise dynamically, especially administered prices for health and elderly care. By contrast, non-energy industrial goods prices are expected to continue to rise by only very little. Despite the recent rise, energy prices are likely to continue to dampen headline inflation for the time being, partly owing to base effects from the previous year. A variety of methodological changes to the HICP took effect at the beginning of the year. Amongst other things, they significantly changed the structure of the HICP basket of goods and required modifications to how prices are analysed. However, they have had little impact on the inflation outlook. 

The economy is likely to continue to recover in the first quarter, albeit with weak momentum. According to the ifo Institute, the majority of firms still had pessimistic business expectations in January and assessed their business situation as unfavourable. Weak capacity utilisation in industry is continuing to dampen investment. Owing to its poor competitive position, German industry is additionally deriving only limited benefit from global economic growth. Demand for German industrial products has recently risen sharply, to be sure. However, a large part of the particularly steep rise in domestic new orders is likely to be attributable to large orders in connection with additional government spending on defence, which do not have a direct impact on production. In construction, public sector entities generally also placed significantly more new orders. As new orders in housing construction, too, have recently risen steeply, the recovery in demand in construction is broadening. However, weather conditions have so far tended to be unfavourable compared with the end of the previous quarter, which could dampen construction output. In addition, initial available indicators suggest that households may not be able to maintain their elevated levels of consumption. From the second quarter onwards, however, the German economy is likely to grow more dynamically, driven mainly by fiscal stimulus. 

The government deficit ratio decreased somewhat last year, standing at 2.4 %. However, the structural budgetary position deteriorated slightly. 1  The deficit ratio decreased on balance due to the last of the temporary crisis assistance measures being discontinued. Higher social contribution rates and one-off tax developments also had a deficit-reducing effect. However, strong expenditure growth worked in the opposite direction. The biggest factors here were higher social security fund expenditure and increased spending on personnel. The impact made by the political priorities of infrastructure and defence was only limited up to this point.

Starting this year, the expansionary fiscal stance will push up the deficit and the debt ratio sharply. The Bundesbank expects the deficit ratio to increase to 4½ % by 2027. Without central government taking countermeasures in order to comply with the debt brake, the deficit ratio would rise further towards 5 % in 2028. The rise in deficits is mainly due to sharply increasing government expenditure. On top of this are tax cuts, especially for enterprises. The expansionary spending stance builds on a structural expenditure ratio of almost 50 % in 2025. The structural revenue ratio stood at almost 48 % in 2025 and is unlikely to fall substantially despite tax cuts, as social contribution rates are likely to rise significantly. 

The central government deficit increased last year by €35 billion to almost €85 billion (budget result including off-budget entities). The plans continue to indicate a great need for action in the medium term. However, the 2025 deficit remained considerably lower than anticipated last summer. The consolidation needed in the core budget so as to comply with the debt brake has lessened significantly for 2027. This is mainly due to more favourable tax revenue and reserve developments. However, the action needed remains substantial for 2028 and 2029. It therefore makes sense for central government to avoid adding to the burdens on its budget and to subject its expenditure and tax concessions to a rigorous review. 

In 2025, the expanded scope for borrowing led to significantly higher debt financing. Expenditure on defence and infrastructure did not rise to the same extent. The new Infrastructure and Climate Neutrality Fund was able to borrow for its projects (including for investments shifted from the central government budget). This is because the requisite minimum investment ratio of 10 % was achieved in the budget plan. To actually hit the minimum ratio, central government’s core budget would have needed to see an additional €6 billion in investment. Borrowing by the new off-budget special fund amounted to €24 billion. Infrastructure investment in the core budget and the new off-budget special fund – defined more narrowly as per the Bundesbank’s recommendation – as well as investment by the Climate Fund fell somewhat compared with 2024. Expenditure recorded by central government under the new exemption for defence spending rose significantly on 2024, by roughly €11 billion. Borrowing under the sectoral exemption was significantly higher, at almost €29 billion.

Where intended to swiftly overcome challenges in defence and infrastructure, temporarily higher deficits are acceptable. There needs to be a reliable way forward with regard to bringing the high deficits back down, and a targeted focus on the challenges ahead.

The Bundesbank has submitted proposals to make more targeted use of the expanded scope for borrowing and to reliably safeguard sound government finances. First, these recommendations aim to make sure that, with debt service set to increase significantly going forward, Germany does actually see, as far as possible, s a corresponding improvement in defence capabilities and infrastructure in return. Second, it is a matter of reliably safeguarding sound government finances. The aim of a revised borrowing limit is to take account of the EU’s fiscal rules. It is also designed to facilitate a relatively steady fiscal policy in the face of persistently elevated government investment. In the case of the pension, health and long-term care insurance schemes, it will be important for the upcoming reforms to rein in expenditure. In view of demographic developments and the room for improvement in terms of defence and infrastructure, there is no doubt that the pressure on government finances is high. That being said, sound government finances are and will remain an essential basis for sustainable economic growth and reliable social systems.