With a gross domestic product of 4,470 billion euros in 2025, Germany remains the world’s third-largest economy—behind the United States and China and just ahead of Japan—and is thus also Europe’s largest economy. Exports of motor vehicles and vehicle parts, as well as chemical products, in particular, have made Germany the world’s third-largest exporting nation. At 70%, the service sector accounts for the largest share of the country’s gross domestic product (GDP).
Data retrieved: 8 May 2026
Current insights in May 2026
- Economic growth
- Export
- Inflation
- Unemployment
- R&D
Government Cuts Growth Forecast in Half to +0.5 Percent
Due to the consequences of the war in Iran, the German government now expects only minimal growth in Germany this year and has cut its economic forecast in half. Gross domestic product is now expected to grow by +0.5%—in January 2026, the government had still projected growth of +1.0%. The economic recovery expected for this year is once again being slowed by external geopolitical shocks. The war in Iran is driving up energy and raw material prices, which is putting a strain on households and increasing costs for the German economy.
For 2027, the federal government expects growth of +0.9%. However, further economic development depends largely on how the conflict in the Middle East unfolds and is associated with “considerable uncertainties.”
Business sentiment in Germany has also deteriorated further. The ifo Business Climate Index fell to 84.4 points in April 2026, down from 86.3 in March 2026. Businesses are looking at the coming months with considerably more pessimism and also assess their current situation more negatively.
The public spending ratio, which indicates the government’s influence on an economy, is calculated as total government spending as a percentage of GDP. According to the European Commission, this stood at 50.2% in Germany in 2025, representing a further increase of 0.7 percentage points compared to 2024. This put the public expenditure ratio slightly above the EU average of 49.6%, but significantly above that of other major economies, such as the United Kingdom (46.9%), Japan (41.3%), and the United States (39.6%).
According to the OECD, the combined income tax and social security contributions paid by both the employee and the employer for a single employee in Germany amounted to 49.3% in 2025. This means that among all 38 OECD member states, Germany has the second-highest tax rate after Belgium and is significantly above the OECD average of 35.1%, which undermines Germany’s attractiveness as an investment location. The rate is also significantly lower in countries outside the EU, such as the United Kingdom (32.4%) or the United States (30.0%).
Current forecasts by German economic research institutes and government organizations regarding GDP growth in Germany range from +0.5% to +1.2% for the calendar year 2026 and from +0.9% to +1.6% for 2027. It is also evident that the most recent forecasts from March and April 2026 show a negative trend, whereas the forecasts from November and December 2025 still anticipated a positive trend:
Data retrieved: 8 May 2026
German Exports Rose Slightly in March 2026
Despite the war in Iran, exports from Germany rose by +0.5% in March 2026 compared to the previous month. The year-over-year comparison with March 2025 was also positive, showing growth of +1.9%.
Imports rose by +5.1% in March 2026 compared to February 2026 and by +7.2% year-over-year compared to March 2025. Exports totaling 135.8 billion euros were offset by imports totaling 121.5 billion euros in March 2026. This resulted in a foreign trade surplus of 14.3 billion euros for March 2026, down from 19.6 billion euros in February 2026.
The United States remained the most important foreign market. However, exports worth 11.2 billion euros represented a decline of -7.9% compared to the previous month. Compared to March 2025, the decline was as high as -21.4%. Exports to China also fell by -1.8%. Instead, German exporters found their customers primarily within the EU (+3.4% compared to February 2026) and in the United Kingdom (+3.2%).
For the full year 2026, however, the German Chamber of Industry and Commerce now expects German exports to stagnate due to the war in Iran, rather than growing by one percent as previously anticipated.
Real (price-adjusted) order intake in the manufacturing sector rose by -5.0% in March 2026 compared to February 2026, after seasonal and calendar adjustment. Excluding large orders, order intake was +5.1% higher than in the previous month. In the less volatile three-month comparison, order intake in the first quarter of 2026 was 4.1% lower than in the fourth quarter of 2025.
Real (price-adjusted) production in the manufacturing sector fell by 0.7% in March 2026 compared to February 2026, after seasonal and calendar adjustment. In the less volatile three-month comparison, production in the first quarter of 2026 was 1.2% lower than in the fourth quarter of 2025.
Inflation continues to rise in April 2026, reaching 2.9 percent
The price shock resulting from the war in Iran has further driven up the inflation rate in Germany in April 2026. Consumer prices were 2.9% higher than in the same month a year earlier—up from 2.7% in March. Inflation was last this high in January 2024; the rate last exceeded three percent in December 2023, at 3.7%. Household energy and fuel cost 10.1% more in April 2026 than a year earlier. Energy prices in Germany had already risen rapidly by 7.2% in March 2026.
No oil is currently flowing through the Strait of Hormuz, through which one-fifth of global oil consumption normally passes. This is causing a shortage, which is why world market prices have risen. Because expensive energy drives up companies’ production and transportation costs, there is great concern that prices for food, dining out, and services will also rise.
Economic research institutes are currently forecasting an average inflation rate of +2.0% to +2.9% for 2026:
Data retrieved: 8 May 2026
Unemployment figures remain above the three-million mark
The spring upturn in the labor market continues to be weak. In April 2026, 3.008 million people were registered as unemployed nationwide. Compared to the previous month, this represents only a slight decline—in March 2026, the number of unemployed stood at 3.021 million.
The unemployment rate remained unchanged at 6.4% in April 2026 compared to March 2026. As a result, the slight decline in the number of unemployed this April was weaker than the average for this month over the past three years.
International uncertainties are weighing on economic development. As a result, companies remain cautious about hiring new employees. The creeping deindustrialization of Germany as a business location and the resulting job cuts in the manufacturing sector are also weighing on the labor market. At the same time, the increasing use of artificial intelligence is leading to the elimination of entry-level office jobs in particular. Finding employment is therefore particularly difficult for the unemployed and those just entering the workforce. However, the risk of becoming unemployed after securing a job remains low in a long-term comparison due to labor laws, which are strongly focused on protecting employees.
Spending on education, research, and science rose by 5 percent in 2024
According to preliminary estimates, public budgets and the private sector spent 426 billion euros on education, research, and science in Germany in 2024. In nominal terms (not adjusted for inflation), this represented an increase of 21 billion euros, or 5 percent, compared to the previous year. The share of spending in gross domestic product (GDP) rose slightly in 2024 compared to the previous year, by 0.2 percentage points to 9.8%.
The education budget of public budgets and the private sector totaled 305 billion euros in 2024 (share of GDP: 7.0%), which was 6% more than in the previous year. Expenditures by companies and non-university research institutions on research and development amounted to 113 billion euros in 2024, an increase of 4% compared to the previous year. A total of 8 billion euros was spent on other educational and scientific infrastructure (e.g., libraries or museums), an increase of 5%.
A survey of 400 CFOs at international companies in Germany reveals a continuing downward trend in key location factors, but also points to new business opportunities. In our study “Business Destination Germany 2026,” we analyze the data and identify the most important areas for action.
Our most important study results, analyses, and classifications for strategic adjustments to the key areas of geopolitics, artificial intelligence, and sustainability can be found in our white paper From Fragmentation to Trusted Growth: What Matters for Leaders in 2026.
The KPMG Global Navigator provides insights into global growth prospects, opportunities, and challenges.
Our CEO Outlook 2025, for which 1,350 CEOs of large companies around the world were surveyed, including 125 CEOs in Germany, also provides assessments of the economic situation, generative AI, ESG, and other current topics.
Our Future Readiness Monitor 2025, for which 570 top decision-makers in the German economy were surveyed, also provides an assessment of German companies' own future viability in light of new opportunities and complex tasks, their investment plans, and their assessment of trends in the coming years.
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