The global economy remained robust in the third quarter of 2025. In the United States, GDP is likely to have grown markedly again despite the higher import tariffs. In China, by contrast, economic activity weakened somewhat. This was mainly due to weaker domestic demand, whilst exports remained fairly buoyant. In the euro area, economic activity grew slightly again. Overall, the global economy proved resilient to the burdens arising from trade disputes.

Global trade in goods also held up well overall in the summer months, despite the sharply risen US tariffs. Nevertheless, there were marked changes in the regional structure of global trade. US foreign trade, which accounted for around 14 % of global imports of goods in 2024, was impacted to a considerable degree by the restrictive trade policy. In particular, imports to the United States from China fell substantially in comparison with the start of the year. Outside of the United States, international trade in goods remained buoyant. It remains to be seen whether the burdens arising from trade policy disputes will have a greater impact on global trade over the remainder of the year. 

International trade policy continued to be characterised by considerable unease. The US administration pushed ahead with its trade policy agenda. Various sector-specific tariff rates were increased. At the same time, the US administration reached framework agreements for future trade relations with other, predominantly Asian countries. As in previous negotiations, the United States was able to gain concessions from its partners. There was a certain degree of de-escalation in the trade dispute between the United States and China. Both parties agreed on moderate reductions in tariffs as well as additional relief measures. Prior to this, both sides had exchanged significant threats. In particular, potential restrictions on the export of rare earths by China would have also entailed considerable risks for the European economy. However, even after the agreement between the United States and China, the risk of renewed escalation remains.

Energy commodity prices have generally declined slightly over recent months. As this report went to press, the price of a barrel of Brent crude oil stood at US$63, which is around 7 % lower than in August and 15 % lower than one year ago. The main reason for this was the emerging oversupply in the global oil market, particularly as a result of the expansion of production among the OPEC countries. The latest US sanctions on the Russian oil sector led to just a slight increase in the price of oil at the end of October. European gas prices likewise fell on the year. 

The disinflation process in the advanced economies has stalled in recent months. Consumer price inflation in the advanced economies increased to 2.9 % on the year in September, up from 2.6 % in July. The core rate fell marginally to 2.8 % during the same period. In most of the advanced economies, inflation is likely to decline again in the coming months. This is suggested by the diminishing tightness in the labour market and the weaker growth in wages. Only in the United States is increasing pass-through of tariffs likely to lead to persistently strong rises in consumer prices. 

In the global financial markets, risk appetite continued to grow despite the trade disputes, which have since re-escalated. Together with favourable macroeconomic developments for the euro area, falling capital market rates in the United States, and persistent optimism about the economic potential of artificial intelligence, this bolstered equity prices. These reached new highs on both sides of the Atlantic at the end of October and the beginning of November, respectively. Although prices temporarily saw significant declines in early October due to the escalation of the trade dispute between the United States and China, market sentiment remained resilient overall. In the market for European corporate bonds, greater risk appetite dampened risk premia, which recently stood close to their historical lows across all credit rating classes. By contrast, the spreads on French government bonds widened slightly in light of the political developments and fiscal uncertainties in France. As a result, for the first time since the introduction of the euro, the yields on French government bonds were for a time higher than those on Italian government bonds, which saw somewhat declining yields.

Yields on US government bonds declined markedly, while those on German federal bonds rose slightly on balance; nevertheless, the euro depreciated somewhat against the US dollar. In the United States, there was a marked decline in the yields on ten-year US Treasuries. A negative impact was had, in particular, by the unexpectedly weak US labour market, which was a major factor in the deterioration of the overall economic picture in the United States. In addition, market participants expected further interest rate cuts from the US Federal Reserve, potentially as early as the next meeting of the Federal Open Market Committee in December this year. In the euro area, by contrast, the yields on government bonds rose slightly. One reason for this was that the euro area economy proved more resilient than had been initially assumed. At last report, the majority of market participants expected that the Eurosystem’s rate-cutting cycle had been completed. Overall, the interest rate spread between the currency areas narrowed. However, the euro depreciated slightly on balance against the US dollar, thus ending its pronounced weak phase from the first half of the year.

The ECB Governing Council left its three key interest rates unchanged at its monetary policy meetings in September and October 2025. The deposit facility rate, through which the Governing Council steers the monetary policy stance, continues to stand at 2 %. In the baseline of the ECB staff projections from September, headline inflation is set to average 2.1 % in 2025, 1.7 % in 2026, and 1.9 % in 2027. 

Monetary growth in the euro area continued to slow in the third quarter of 2025. The broad monetary aggregate M3 expanded to a lesser extent than in the previous quarter, with its annual growth rate falling to 2.8 % by the end of September. Overnight deposits, in particular, recorded smaller inflows. As the uncertainty in the financial markets abated following the agreement in the trade dispute between the European Union and the United States, institutional investors, in particular, reduced the liquidity buffers that they had built up previously.

Lending to the domestic private non-financial sector in the euro area stabilised at a moderate level. In net terms, growth in loans to non-financial corporations remained subdued again in the third quarter, despite a further fall in lending rates and a gradual upturn in investment activity. This especially affected demand for loans in the industrial sector, for which global conditions remained difficult despite the agreement reached in the trade dispute with the United States. The banks surveyed by the Bank Lending Survey (BLS) slightly tightened their credit standards for loans to enterprises, as they perceived a slight increase in credit risk in the third quarter. They had no plans to adjust their standards in the fourth quarter.

Economic output in Germany remained stable in the third quarter despite adverse circumstances. According to the flash estimate from the Federal Statistical Office, real GDP remained unchanged on the quarter in seasonally adjusted terms, after having fallen by 0.2 % in the previous quarter. Economic activity was dampened, in particular, by the headwinds for the export industry caused by higher US tariffs, but also by the appreciation of the euro. This is putting additional strain on the already deteriorated competitive position of German exporters. Nominal exports of goods to the United States fell sharply, as they had in the previous quarter. As a result, exports also declined overall. German industry thus remained weak, with sales and production falling. By contrast, enterprises in the services sector were able to increase their activity, even though private consumption likely provided no stimulus. According to a press release from the Federal Statistical Office, investment in machinery and equipment made a positive contribution to economic output. A role in this may have been played by lags due to the more generous depreciation options in place since July, which were introduced under the immediate tax investment programme.

Lending business with the non-financial corporate sector grew moderately in the third quarter, following net outflows over the past three quarters. According to the German banks surveyed by the BLS, the decline in the general interest rate level was the main driver of the increased demand for loans to enterprises. In the view of the BLS banks, positive stimuli came from financing needs for fixed investment, as well as mergers, acquisitions and restructuring, and also enterprises’ reduced scope for internal financing. However, there is still no visible indication of a widespread improvement in investment sentiment. This is also suggested by the fact that the BLS banks tightened their lending conditions for corporate customers again in the third quarter, which they justified on the grounds of increased credit risk, due in particular to sector-specific and firm-specific factors. 

The situation in the construction sector remains mixed. Whilst output in building construction was reduced, partly because there was still a significant lack of orders, more substantial growth in civil engineering was hindered mainly by labour shortages. Overall, construction output declined somewhat. Lending to households for house purchase continued the recovery that has been observed since the third quarter of 2024. Alongside the existing high demand for housing, this recovery was driven by the fact that the prices for existing properties remain comparatively attractive.

There is still no sign of an improvement in the labour market. Employment fell slightly in the third quarter, after having remained virtually unchanged since mid-2023. However, employment subject to social security contributions – which is an important pillar – remained stable. On the one hand, it continued to fall markedly in the manufacturing sector. On the other hand, however, more jobs were filled in some sectors of the economy – especially services – that are benefiting from demographic change and the energy transition. Unemployment rose only marginally. As before, leading indicators give no promise of an improvement in the subdued rate of employment growth. 

Negotiated wages temporarily stopped rising in the third quarter due to one-off effects. Including additional benefits, they fell by a marginal 0.1 % on the year in the third quarter of 2025, compared with growth of 5.8 % in the second quarter. This temporary stagnation came about due to a negative base effect from the third quarter of 2024, when high inflation compensation bonuses and previously agreed increases in negotiated wages in retail and wholesale trade were paid out. Basic pay rates excluding special and one-off payments, meanwhile, continued to rise sharply in the third quarter, at 5.0 % on the year, albeit not quite as strongly as in the second quarter. This is because the old wage agreements with higher phased increases are gradually expiring. Owing to the weaker macroeconomic environment and declining inflation, new wage agreements will probably remain lower. 

In contrast to negotiated wages, actual earnings are likely to have risen steeply in the third quarter. This means that they would significantly exceed negotiated wages. One factor here is that, in 2024, the inflation compensation bonuses were paid out predominantly at enterprises bound by collective agreements. As a result, the discontinuation of these bonuses is dampening negotiated wages in 2025 significantly more strongly than actual earnings, which also include non-negotiated wages and wages outside of collective agreements.

The general statutory minimum wage will be raised substantially from January 2026. On 29 October, the German Federal Cabinet decided to gradually raise the rate from the current €12.82 per hour to €13.90 per hour as at 1 January 2026 and to €14.60 per hour as at 1 January 2027. These increases will have a direct and strong impact on the lower wage brackets in the low-wage sectors. In addition, by way of spillover effects on remuneration somewhat above the minimum wage, they will contribute to a higher aggregate wage increase. 

Consumer prices continued to pick up moderately in the third quarter of the year. In seasonally adjusted terms, the Harmonised Index of Consumer Prices (HICP) rose again by 0.5 % on the quarter. Price dynamics for services, though still strong, declined somewhat. This was partly due to falling prices for travel services, which generally fluctuate quite strongly. By contrast, prices for industrial products rose somewhat more sharply than in the two preceding quarters, despite the overall dampening effect of the appreciation of the euro, even though the corresponding import prices fell. This suggests that the potential tariff-induced effects relating to the diversion of Chinese exports from the United States to Germany have so far not yet had a major price-dampening impact at the consumer level. Energy prices remained virtually unchanged in the third quarter. Food price dynamics were similarly strong to those in the previous quarter. The annual inflation rate remained unchanged in the third quarter of 2025 at 2.1 %. The underlying price pressures were stronger, however. Core inflation (excluding energy and food) fell sharply from 2.8 % in the previous quarter to 2.4 %, However, if the volatile components of clothing and travel services are excluded, the core rate held steady at around 3 % – virtually unchanged since mid-2024. In October, the inflation rate, at 2.3 %, remained somewhat above 2 %. Core inflation rose to 2.8 %.

Over the next few months, the inflation rate is likely to be somewhat higher for a time, owing mainly to base effects. In November, a base effect on travel services prices is pushing up the inflation rate. Over the short term, this is likely to overshadow the generally expected disinflation process in the services sector due to the trend decline in wage growth rates. At the beginning of next year, an inflationary base effect on food will contrast with falling energy price inflation. With regard to energy, the price-dampening effects of lower electricity grid fees will outweigh the higher carbon prices in the national emissions trading system. After that, the inflation rate could fall back to somewhat above 2 %. The inflation outlook for the beginning of next year will be fundamentally more uncertain than usual, as the HICP will be migrated to a new classification framework for the reporting month of January 2026.

Economic output could go back up slightly again in the fourth quarter. Owing to its poor competitive position, German industry is deriving only limited benefit from the persistently moderate global economic growth. The higher US tariffs are another reason why foreign demand is not expected to provide any impetus in the short term. However, the dampening after-effects of the anticipatory frontloading of exports to the United States seen in the first quarter are now likely to have receded. Overall, exports and industry could therefore stabilise in the fourth quarter. Construction is also likely to move more or less sideways. Demand for construction work continued to pick up, but remained too low to be reflected in production at this point. Continued impetus for investment in construction and machinery and equipment as a result of the announced fiscal easing will probably only materialise as from next year. Moreover, industrial capacity utilisation remains low, which is likely to continue to be a drag on business investment. By contrast, service providers, though not necessarily in the consumption-related sectors, are likely to provide positive growth stimuli again in the fourth quarter. The subdued labour market outlook is weighing on private consumption. 

Public finances look set for expansionary fiscal policy over the coming years. The deficit ratio and debt ratio will increase significantly under the looser national borrowing limits. This year, the deficit ratio will continue to decline and could amount to just over 2 %. However, it is expected to rise above 3 % next year and to probably exceed 4 % thereafter. As a result, the debt ratio will increase steadily. As at mid-2025, it stood at 62.4 %.

Deficits are on the rise because many expenditure items are growing sharply. Spending on defence, in particular, is likely to see strong growth. In addition, expenditure on infrastructure, pensions, health and long-term care as well as on interest is likely to go up sharply. The German Federal Government is financing increasing defence spending through the new debt brake exemption and thus by borrowing. The Infrastructure and Climate Neutrality Fund offers further scope for borrowing. 

The majority of the large deficit is attributable to central government, which is making extensive use of its new scope for borrowing. Central government is making full use of the regular debt brake. In addition, it is planning considerable net borrowing through its exemption for defence spending and via the Infrastructure and Climate Neutrality Fund. This planned additional debt is significantly higher than the additional expenditure on central government infrastructure and on defence. Moreover, debt-financed resources from the Infrastructure and Climate Neutrality Fund will go to the federal states in the form of grants. The federal states are not pledging any additional investment expenditure, meaning that very limited additional infrastructure investment by state and local governments can be expected at best. Resources will also be channelled to the Climate Fund, which will use them largely to finance the recently agreed reduction in the electricity grid fee, as well as to non-government entities – particularly enterprises. In addition, the core budget will gain scope for other expenditure. Nevertheless, there are still budget gaps in planning as of 2027. How central government plans to close these is as yet unclear. The federal states will experience moderate structural deficits if they exploit at least some of their new leeway for structural borrowing. They will obtain budget relief from the fact that they will receive extensive resources from the Infrastructure and Climate Neutrality Fund without being obliged to make additional investment spending in return. Local governments are likely to reduce their overall large deficit, probably with support from state governments. The statutory pension insurance scheme is expected to experience sharply rising deficits for a time before the sustainability reserve is largely exhausted and the contribution rate then rises sharply in 2028. 

Since Germany reformed its fiscal rules in March of this year, central government has had very significant scope for additional borrowing, which is to a large extent open-ended (for defence). Temporarily high deficits are appropriate given the major challenges in defence and infrastructure as well as Germany’s comparatively low debt ratio. However, in order for German government finances to remain sound, the deficit ratio will have to come back down again in the future. This is likewise required by EU rules. These stipulate that, after the current exemption for defence spending ends, the deficit ratio must be brought back down below 3 % initially and likely towards 1 % at a later date. This is in keeping with the debt anchor capping the debt ratio at 60 %: the debt ratio should move reliably towards the anchor level. 

Against this backdrop, the Bundesbank is recommending a new reform of the debt brake in three stages. According to this proposal, the current phase (stage 1) with higher deficits for defence could run until 2029. However, the Bundesbank recommends that, during this period, new borrowing should be focused more strongly on acute additional needs for defence and infrastructure. In the subsequent transitional phase (stage 2) from 2030 to 2035, the structural deficit ratio would decline in relatively steady steps towards 1 %. To this end, central government would gradually reduce financing of defence spending through net borrowing under the exemption for defence expenditure (by 0.5 % of GDP each year). The exemption for defence spending would expire as of 2036, and, from then on, an adequately designed debt brake would enter into force in the third stage. This is largely consistent with the proposals presented by the Bundesbank at the beginning of 2025. The debt brake would then safeguard sound public finances and comply with the EU rules. It would also allow a base net borrowing level of 0.8 % of GDP for additional debt-financed infrastructure investment. The aim is to strengthen infrastructure and ensure that it is maintained at a good level. In addition, the specific design of the debt brake would support steady fiscal policy (for instance via an augmented cyclical adjustment procedure). In the target zone, the structural deficit ratio would be capped at 1 % overall as long as the debt ratio continues to exceed 60 %. If the debt ratio is below 60 %, the cap could be set at 1½ %.