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 automotive parts, as well as chemical products, in particular, make 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). With a share of around 26%, industry in Germany makes a comparatively high contribution to economic output. In other European countries such as France or the United Kingdom, as well as in the U.S., this figure is about 17%, whereas in China it is around 38%.
Data retrieved: 9 July 2026
Current Insights in July 2026
- Economic growth
- Export
- Inflation
- Unemployment
- Gross government investment
Economic Experts Significantly Lower Economic Forecast
Thanks to the hoped-for end of the war in Iran and high government spending, the German economy could perform slightly better this year than recently feared. For both the current year and the coming year, the Ifo Institute expects German gross domestic product to grow by +0.8%. However, the aftereffects of the war-induced energy price shock will be felt for a long time to come: The institute expects an inflation rate of 2.9% this year and 2.7% next year.
The long-term outlook also remains bleak: Economic researchers expect the German economy’s potential growth to fall to 0.1% by the end of the decade.
Business sentiment in Germany improved slightly again in June 2026. The ifo Business Climate Index rose to 85.6 points, up from 85.0 in May 2026. Companies assessed their current situation more positively, and their expectations were also somewhat less skeptical. Overall, companies view the business environment as less uncertain and hope for an easing of the global political situation.
The public expenditure ratio, which indicates the government’s influence on a national economy, is calculated as total government spending as a percentage of GDP. According to the European Commission, this ratio stood at 50.2% in Germany in 2025, marking a further increase of +0.7 percentage points compared to 2024. This placed Germany’s 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, income tax plus employee and employer social security contributions for a single worker with an average income amounted to 49.3% in Germany in 2025. This means that, among all 38 OECD member states, Germany has the second-highest tax and contribution rate after Belgium and is significantly above the OECD average of 35.1%, which significantly undermines Germany’s attractiveness as an investment location. The rate is also considerably lower in countries outside the EU, such as the United Kingdom (32.4%) or the United States (30.0%).
The current forecasts by German economic research institutes and government organizations regarding GDP growth in Germany range from +0.4% to +0.9% for the calendar year 2026 and from +0.8% to +1.4% for 2027:
Data retrieved: 9 July 2026
German exports rise in May 2026 for the fourth consecutive month
German exporters have extended their winning streak despite the headwinds from the war in Iran: Their exports rose unexpectedly in May for the fourth consecutive month. Driven by higher demand from the U.S. and China, exports of goods grew by 0.9% compared to the previous month and by as much as 6.1% compared to May 2025 , reaching 137.9 billion euros. Imports, on the other hand, fell by 2.5% from the previous month to 118.8 billion euros. Compared to May 2025, however, they were 6.9% higher.
The growth in exports is attributable in particular to higher exports to the U.S. German goods worth 14.1 billion euros were shipped there, which was 23.1% more than in the previous month.
Sentiment in the German export sector has also improved somewhat. The ifo Barometer for export expectations rose to -3.7 points in June 2026, up from -5.7 points in May.
Real (price-adjusted) order intake in the manufacturing sector rose by 1.9% in May 2026 compared with April 2026, after seasonal and calendar adjustment. Excluding large orders, order intake was also 1.0% higher than in the previous month. In the less volatile three-month comparison, order intake from March through May 2026 was 0.2% lower than in the previous three months.
Real (price-adjusted) production in the manufacturing sector rose by 0.9% in May 2026 compared with April 2026, after seasonal and calendar adjustment. In the less volatile three-month comparison, production from March through May 2026 was 0.1% higher than in the previous three months.
Inflation Falls to 2.3% in June 2026
Inflation in Germany fell again in June as the conflict with Iran eased—leading to falling oil prices—and due to the fuel subsidy that took effect in May and June. The inflation rate thus stood at just 2.3% year-over-year, down from 2.6% in May and 2.9% in April.
Overall, energy prices rose by 3.4% in June compared to the same month a year earlier. Food prices rose by 0.4%, while services such as insurance and travel rose by 3.1%. Prices excluding food and energy—also known as core inflation—rose by 2.5%.
Economic research institutes currently forecast an average inflation rate of +2.6% to +3.1% for 2026 and inflation of +2.0% to +3.0% for 2027:
Data retrieved: 9 July 2026
Unemployment Figures Drop Only Slightly in June
The number of unemployed people in Germany fell by 15,000 in June compared to May, to 2.936 million. The unemployment rate dropped by 0.1 percentage points to 6.2% over the same period. According to the Federal Employment Agency, there has been little change in the labor market. Unemployment is falling only slightly, and employment subject to social security contributions continues its slight downward trend.
Although the risk of becoming unemployed due to job loss remains relatively low in a long-term comparison despite continuous increases, the chances of finding employment again after becoming unemployed are at a historically low level.
Gross government investment rose by +12.3% in 2025
Driven by increased defense spending, the German government’s investments rose at a rate not seen since the turn of the millennium. Gross investments totaled 147.5 billion euros in 2025. That was 12.3%—or 16.2 billion euros—more than in the previous year. This marked the largest increase in government investments since 2000.
The reason for the significant increase in 2025 was the sharp rise in government investment in equipment, which grew by nearly half (+47.7%). This was also attributable to increased spending on weapons systems and other procurements by the Bundeswehr.
In 2025, gross government fixed investment accounted for just under one-sixth (16.3%) of total gross fixed investment in Germany, which amounted to 907.8 billion euros. The government’s contribution was largest in construction investment, at just over 17%.
Despite the significant increase in investment, Germany performed below the EU average. The share of gross government investment in economic output stood at 3.3% in 2025—compared to an EU average of 3.9%. In the Netherlands (3.5%), Italy (3.8%), Austria (3.9%), France (4.5%), and Poland (5.4%), the ratio was higher than in Germany. Estonia led the 27 EU member states with a share of 7.6%.
At the same time, net fixed investment—that is, gross fixed investment minus depreciation—was negative at -10.3 billion euros.
A survey of 400 CFOs from the largest international companies in Germany—representing the most important investor countries—confirms a continuing downward trend in key location factors, but also highlights the country’s strengths as a business location and new business areas. As part of our study “Business Destination Germany 2026,” we analyze the figures and identify the most important areas for action.
Our key study findings, analyses, and recommendations for strategic adjustments focused on 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 offers insights into global growth prospects, opportunities, and challenges.
Our CEO Outlook 2025, for which we surveyed 1,350 CEOs of large companies worldwide—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 business community were surveyed, also provides an assessment of German companies’ future readiness in light of new opportunities and complex challenges, as well as their investment plans and views on trends for the coming years.
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