Germany’s new government faces major challenges in executing its economic strategy, especially due to a growing lack of trust. Nonetheless, projections suggest a slight recovery in growth is possible.
Political uncertainty weighs on Germany’s economic outlook
Germany’s newly elected Chancellor, Friedrich Merz, must implement his economic agenda amidst skepticism from both parliament and the general public. His election to the Bundestag on May 6 was only confirmed in the second round of voting, underscoring weak parliamentary confidence—a key risk to Germany's economic trajectory.
Merz now leads a coalition between the CDU and the Social Democratic Party (SPD), which currently ranks as only the third-strongest party in parliament. With a slim majority, the coalition emerged after the CDU won 28.5% of the vote. The SPD was seen as the only feasible partner besides the far-right AfD, which further complicates the political climate.
Policy missteps and public distrust threaten reform efforts
The coalition is already under pressure due to controversial decisions, such as a shift in policy regarding the national debt brake and cooperation with the AfD on migration issues. Merz’s confrontational political style has also faced criticism from various parliamentary factions. Analysts suggest his election was more about avoiding another vote—where the AfD might emerge even stronger—than about widespread support.
Public trust is another major hurdle. According to recent surveys, 73% of respondents feel misled by Merz, and just 44% believe he is suited to lead the country. This growing distrust is likely to hamper both consumer confidence and private investment—factors critical to economic revival.
Structural weakness in the german economy
The German economy has been flatlining for years, with industrial output in recession since 2018. Since mid-2023, only the public sector has provided any significant growth stimulus. With external factors like U.S. tariffs and a lack of innovation weighing down momentum, a robust turnaround appears difficult under the current conditions.
New economic measures: ambitious but underfunded
The government aims to rejuvenate the economy through a mix of tax relief, energy subsidies, and labor market reforms:
- From 2027, income taxes for low and middle-income households will be reduced.
- Corporate and electricity taxes will be brought down to EU minimum levels.
- Energy-intensive industries will receive price relief.
- The automotive sector and e-mobility projects will get targeted support.
- Flexible working hours and a higher minimum wage aim to boost productivity and consumer spending.
However, the financing for many of these initiatives remains unclear. Experts estimate a €50 billion budget gap for the current legislative period. Debate continues over reforms to the debt brake, particularly as defense and security expenses now exceed 1% of GDP. A €500 billion fund has been earmarked for climate protection and infrastructure investment, which could drive national debt up from 62.5% to 80%.
Modest growth forecast for the German economy in 2025
If implemented effectively, the proposed measures could lift Germany’s GDP growth from 0.4% to above 1%. This improvement would likely be driven by increased public investment, skilled foreign labor recruitment, and lower corporate taxes. The forecast for 2025 anticipates modest GDP growth of 0.2%; the risk assessment stands at a satisfactory A3.
Why Germany’s economic health matters to Switzerland
As Switzerland’s largest trading partner, Germany's economic performance has a direct impact on Swiss exports, investment trends, and business sentiment. Prolonged instability in the German economy could dampen confidence across borders and hinder bilateral trade development.
