German Economy Lacks Momentum as Business Expectations Decline
Germany has entered the new year with its economic recovery still on shaky ground. The latest survey from the Ifo Institute shows that business expectations weakened in January, catching economists off guard and reinforcing concerns that momentum remains limited despite promises of large-scale government spending ahead.
The expectations index slipped to 89.5 from 89.7 in December, undershooting forecasts that had pointed to a rebound. At the same time, assessments of current conditions edged slightly higher, suggesting that while companies see the present as stable, their outlook for the months ahead has grown more cautious. Ifo president Clemens Fuest said the data show the economy starting the year with little drive.
Key Takeaways
- German business expectations weakened unexpectedly in January, signaling a slow and fragile start to the year.
- Manufacturing sentiment improved, but declining confidence in services highlights an uneven recovery.
- Growth hopes are increasingly tied to 2026, when higher public spending is expected to provide stronger support.
Manufacturing improves, services lose confidence
A closer look at the survey reveals a split across sectors. Manufacturers reported a sharp improvement in business climate, hinting that the industrial downturn may be stabilizing after a difficult period. In contrast, confidence among service providers deteriorated, pointing to softer demand and ongoing pressure in parts of the domestic economy.
This imbalance highlights a recovery that lacks breadth. While industry is showing early signs of resilience, weakness in services suggests that growth is not yet feeding through to the wider economy.
Recovery hopes shift toward 2026
Germany managed to grow in 2025 for the first time in three years, but the expansion was modest and left policymakers underwhelmed. Expectations are now increasingly focused on the medium term, when public investment in infrastructure and defense is expected to play a larger role.
The Bundesbank sees activity strengthening as 2026 unfolds, supported by a more expansionary fiscal stance. The International Monetary Fund has also turned more optimistic, recently upgrading its growth outlook. Investor sentiment mirrors this longer-term view, with expectations at their highest levels in several years.
Structural pressures and trade risks persist
Despite improving forecasts, significant challenges remain. Manufacturing activity is still contracting, even if the pace of decline has eased, as companies grapple with weaker global demand, competition from China, and strained trade relations with the United States.
Corporate developments underline these headwinds. BASF recently reported weaker earnings, reflecting excess capacity and subdued demand from key customers such as the auto industry. Major carmakers including Volkswagen, as well as Porsche and Audi, are cutting production and jobs at home, adding to concerns over Germany’s industrial base.
Adding to the uncertainty, US President Donald Trump briefly floated new tariff threats last week before retreating, a reminder that external shocks can quickly alter the outlook for export-dependent economies like Germany.
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