Germany’s Economic Situation

A service from Berlin Kommunikation and BWA, Federal Association for Economic Development and Foreign Trade — Global Economic Network projects 0.7% growth. This leaves Germany economically at the bottom among industrialized nations, still referred to as the “sick man of Europe.” Key reasons include global uncertainties such as trade conflicts, the war in Ukraine, and energy policy challenges. However, there is hope: a new government after the February elections could stimulate growth through structural reforms and investment packages. Rising wages may also boost consumer spending, although households remain cautious due to concerns about the future. Experts see potential in exports despite challenges in key markets like China and the U.S. The main hurdles remain geopolitical tensions and economic policy uncertainties. Nonetheless, technological advancements and stronger international cooperation could pave the way for recovery.

ARD-DeutschlandTrend: Migration and Economy as Key Issues

With seven weeks left until the federal election, migration is emerging as a key political issue in Germany, according to the latest ARD-DeutschlandTrend survey. The economy follows closely as the second-most important concern. However, the much-anticipated “comeback” by the Social Democratic Party (SPD) has yet to materialize. On Saturday, the SPD is set to officially nominate Olaf Scholz as its candidate for chancellor. Scholz, the incumbent, has promised a “comeback” before the February 23 election after more than three years in office that saw the party’s support decline significantly from its 2021 high of 25.7%. While the latest poll shows a slight increase for the SPD at 15% (+1 compared to mid-December), they still trail far behind the CDU/CSU, which has fallen to 31% (-2). The far-right AfD holds second place with 20% (+1), its highest result in a year. The Greens remain at 14%, while three smaller parties—the Wagenknecht Alliance (BSW) at 5%, and both the FDP and Left Party at 4%—are fighting to clear the parliamentary threshold. Other parties collectively account for 7%.

Bleak Prospects for the SPD Compared to 2021

In 2021, the SPD also struggled early in the polls but gained momentum in the final months. By early September, they surged to 25%, surpassing a weakened CDU/CSU. However, the current political landscape is less favorable for the SPD. While Scholz once enjoyed broad popularity, now only one in five voters is satisfied with his performance. None of the major candidates has inspired much enthusiasm—Robert Habeck of the Greens leads with just 28% approval, ahead of Friedrich Merz (CDU/CSU), whose rating has dropped from 30% to 25%.

Migration and the Economy Dominate the Agenda

The CDU/CSU benefits from a focus on issues where they are seen as more competent. Currently, 37% of respondents consider migration and asylum policies among the top issues requiring political action, a significant 14-point increase in just one month. The economy follows closely at 34%. Other concerns, such as foreign policy (14%), environmental issues (13%), and social inequality (11%), trail behind. Recent events, such as the tragic Christmas market attack in Magdeburg that left six dead and nearly 300 injured, have heightened tensions. While authorities continue to investigate the attack’s motives, the public debate on migration has grown more heated.

Proposals for Economic Revival

To address economic concerns, parties have proposed various measures. The CDU/CSU and FDP have called for overtime bonuses to be exempt from taxes—a measure supported by 78% of respondents. Meanwhile, 71% favor state incentives for companies investing in Germany, a policy championed by the SPD and Greens. A minimum wage increase to €15 is backed by 67%, while 53% support tax cuts for businesses. The AfD’s proposal to abolish the CO2 tax finds support from 48% of respondents, though 39% oppose it. The idea of a state subsidy for domestically produced electric vehicles divides opinion, with 44% in favor and 45% opposed. Additionally, only 28% support lifting sanctions against Russia, as proposed by the AfD, while 61% want the sanctions to remain.

Public Sentiment and Social Issues

The survey highlights growing social discontent. In 2018, 66% of respondents felt they were treated fairly in society; today, that number has dropped to 56%. Meanwhile, 24% now feel disadvantaged, up from 16% in 2018. Social cohesion remains strong within families and communities but is viewed more negatively in public spaces such as shops and streets. The widening gap between rich and poor (77%) and cultural differences (63%) are seen as major challenges. In this tense pre-election period, voters remain focused on key concerns of migration and economic stability. The SPD faces an uphill battle to regain support as Germany’s political landscape continues to shift.

Explaining the Recent Economic Situation: A Mixed Picture for Germany

In November, Germany experienced an unexpected rise in production and exports, providing a brief glimmer of hope amid ongoing economic struggles. The industrial, construction, and energy sectors increased output by 1.5% compared to the previous month. Likewise, exports saw a significant rise of 2.1%, defying expectations after previous declines. However, experts warn that these positive numbers are more of a temporary rebound rather than a sign of a long-term recovery.

Export Fluctuations and the Bigger Picture

The notable rise in exports in November, especially to the U.S. (+14.5%), comes after a sharp 14% drop in October. Alexander Krüger, Chief Economist at Hauck Aufhäuser Lampe, explains that this increase is merely a corrective upswing. As a result, the fourth quarter of 2024 is still expected to close with negative growth in overall export performance.

Industrial Output Remains a Concern

Despite the November uptick, the overall industrial production in 2024 is estimated to have fallen by 4.5%. According to the Kiel Institute for the World Economy (IfW), industrial output remains more than 10% below its 2018 peak. The automotive sector, in particular, continues to face a crisis. A recent report from the Munich-based ifo Institute indicates that the business climate among car manufacturers remains bleak due to a lack of incoming orders.

Economic Challenges in the Winter Months

Jörg Krämer, Chief Economist at Commerzbank, predicts that the winter season will remain tough for the German economy. The return of Donald Trump as U.S. President on January 20 is likely to bring additional tariffs, further straining German exports. Volker Treier, Head of Foreign Trade at the German Chamber of Industry and Commerce (DIHK), warns that the upcoming months may bring “unpleasant” conditions for exporters.

Concerns Among Family Businesses

Family-owned businesses in Germany are bracing for a challenging 2025. According to a recent survey, only 31% of these companies expect growth. Alarmingly, 28% of them plan to reduce their workforce, compared to just 19% intending to hire—a worrying trend for the labor market.

A Bright Spot: The Digital Economy

In contrast to the broader economic downturn, the IT and telecommunications sector continues to thrive. The industry projects a 4.6% increase in revenue for 2025, with 20,000 new jobs expected—twice the number added last year. The software sector, particularly artificial intelligence (AI), is a key growth driver, as reported by the Digital Association Bitkom. In summary, while certain sectors show resilience, the overall outlook for the German economy remains bleak, with ongoing uncertainties in global trade, energy policy, and geopolitical tensions. However, advancements in digital technology offer a beacon of hope for future growth.

Inflation Rises Sharply in December

At the end of the year, inflation in Germany increased for the third consecutive month—and more significantly than expected. Consumer prices in December 2024 were 2.6% higher than in the same month the previous year. The Federal Statistical Office released its preliminary inflation estimate today, surprising economists who had anticipated a more moderate rise. On an annual basis, prices in 2024 rose by 2.2%. In comparison, the inflation rate was 5.9% in 2023, following a historic peak of 6.9% in 2022 when energy prices surged after Russia’s invasion of Ukraine.

Energy Prices Decline, but Food and Services Become More Expensive

The inflation increase in December marks the third monthly rise in a row. After falling for two months, the annual inflation rate climbed to 2.0% in October and reached 2.2% in November, surpassing the 2% threshold for the first time since July 2024. However, inflation remains well below the record high of 8.8% seen in autumn 2022. Energy prices continued to decline in December, dropping by 1.7% compared to the previous year, though this decrease was smaller than the 3.7% drop in November. Meanwhile, food prices rose by 2.0%, up from 1.8% the previous month, while service prices increased by 4.1%, slightly higher than the 4.0% in November.

Inflation Outlook for 2025

Economists expect Germany’s inflation rate to remain above 2% in the coming year. Factors such as the increase in the CO2 tax—from €45 to €55 per ton at the beginning of 2025—are likely to push consumer prices higher. Additionally, the price increase of the Germany-wide transit pass (“Deutschlandticket”) is expected to contribute to inflation. For 2025 as a whole, economists predict an average inflation rate slightly above 2%, similar to 2024. Thomas Gitzel, Chief Economist at VP Bank, highlights rising wage demands as a potential risk, particularly in the service sector. “The end of the inflation compensation bonus is expected to be offset by higher wage growth, according to union strategies,” he explained.

Impact on the Key Interest Rate

The eurozone’s inflation rate, set to be published tomorrow, will play a crucial role in the European Central Bank’s (ECB) next interest rate decision. In 2024, the ECB lowered its key interest rate four times. The deposit rate, which dictates how much banks earn by storing money with the central bank, currently stands at 3.00%. Market traders expect the ECB to cut rates by over 100 basis points throughout 2025. A lower key interest rate typically results in declining interest rates for fixed-term and savings accounts, which is unfavorable for savers. However, cheaper loans may boost consumer spending and stimulate economic growth.

Undeclared Work in Germany: Over 3.3 Million People Working Illegally

In 2024, at least 3.3 million people in Germany engaged in undeclared work. Despite this, Germany performs relatively well compared to other nations. Many countries, including industrialized ones, report much larger shadow economies in relation to their GDP.

What is Undeclared Work?

Undeclared work, a key component of the shadow economy, is defined as the evasion of tax, social security contributions, and regulatory obligations. It remains a significant issue for Germany’s economy, labor market, and fiscal policies. Recent survey findings provide new insights into the extent of undeclared work in the country, painting a surprisingly clear picture of its prevalence.

Measuring the Scale of Undeclared Work: The Known and Unknown

Known Figures („Hellfeld“)
The Financial Control of Undeclared Work (FKS), as mandated by the Act to Combat Undeclared Work (SchwarzArbG), monitors employers and prosecutes illegal employment. In 2023, the FKS conducted 42,631 inspections, primarily in high-risk sectors like construction and hospitality, resulting in over 100,000 criminal cases and nearly 50,000 administrative offenses. The estimated damage to the state amounted to €615 million, with an even higher unreported figure.

Unknown Figures („Dunkelfeld“)
The shadow economy is estimated using various macroeconomic models based on aggregated data. Undeclared work constitutes about two-thirds of the shadow economy, which accounts for approximately 10.3% of GDP between 2014 and 2024—a decline of 4 percentage points compared to the previous decade, partly attributed to improved economic conditions. In the OECD comparison, Germany ranks in the middle, with the U.S. (5.8%), Switzerland (6.2%), and Japan (8.7%) having smaller shadow economies, while Greece (21.4%), Italy (20.4%), and Spain and Portugal (approximately 17%) show significantly higher figures.

Company and Population Surveys

Business surveys estimate that undeclared work costs companies an average of 5% of their revenue, amounting to €300 billion annually. Representative population surveys provide further insights: in the 2015 Socio-Economic Panel (SOEP), 20.7% of respondents knew someone engaged in undeclared work, and the 2019 Eurobarometer survey showed 28% with similar knowledge. However, only 3% admitted to engaging in such work themselves, indicating a discrepancy often observed in direct vs. indirect questioning.

Surveys from 2022 and 2023

Surveys among employed individuals in 2022 and 2023 used techniques such as the nominative technique (NT) to reduce socially desirable responses. Around 70% of respondents reported knowing no one engaged in undeclared work, while nearly 20% knew at least one person. Estimates suggest that 8 to 10 million people in Germany (aged 15 to 74) might engage in undeclared work based on indirect questioning methods. A 2024 survey by the German Economic Institute (IW) showed similar trends: 11.4% knew someone working illegally, and 17.8% knew multiple people, totaling 29% who reported knowledge of undeclared work. When asked if they themselves had engaged in undeclared work in the past 12 months, 5.4% of respondents—approximately 3.3 million people—admitted to doing so. Indirect methods estimate the figure to be as high as 10 million after accounting for duplicate counts. Men (7.5%) are more likely to work undeclared jobs than women (3.5%), and young adults (18–34 years) engage in such work twice as often (11%) as other age groups (3–5%).

Conclusion

Undeclared work has been a persistent issue for decades, causing significant economic and fiscal damage. In November 2024, the German government proposed a bill aimed at modernizing and digitizing the fight against undeclared work. Strengthening the FKS may improve control over social benefit fraud and illegal employment in sectors such as construction and hospitality. However, better enforcement alone may not curb side jobs or unregistered household help. Addressing the root causes of undeclared work, such as the large gap between gross and net wages due to rising social contributions and high tax rates, remains crucial.

No More Salary on the First Sick Day?

In Germany, employees continue to receive their salary from the first day of sick leave. However, due to the high number of sick days, Allianz CEO Oliver Bäte has called for the introduction of a waiting period without pay—sparking a heated debate. Bäte proposed in a Handelsblatt interview that employers should stop paying wages on the first day of sick leave, effectively reintroducing a “waiting day” that was abolished in the 1970s. He cited countries like Sweden, Spain, and Greece as examples.

€40 Billion in Annual Savings?

Bäte argues that the costs for the first sick day should be borne by employees, which would reduce the financial burden on employers. In contrast to Germany, where salaries are paid from day one of sick leave, many other countries have a waiting period. According to Bäte, the average employee in Germany is absent for 20 days per year due to illness, compared to the EU average of 8 days. Employers reportedly spend €77 billion annually on wages for sick employees, with an additional €19 billion covered by health insurers—amounting to 6% of total social security spending. Bäte estimates that his proposal could save €40 billion annually. However, official statistics paint a slightly different picture: The Federal Statistical Office reports an average of 15.1 sick days in 2023. Health insurers such as DAK-Gesundheit even report higher numbers, with an average of 20 days of absence per insured person in 2023, while Techniker Krankenkasse records an average of 17.7 days.

Union Criticism: “Promoting Presenteeism”

Trade unions strongly criticized Bäte’s suggestion. The German Trade Union Confederation (DGB) called the idea “profoundly unjust” and warned of increased “presenteeism”—employees coming to work despite being ill. DGB board member Anja Piel stated, “Even before the pandemic, 70% of employees reported going to work sick at least once a year, with an average of nearly nine days per year despite illness.” Presenteeism not only harms the health of employees but can also lead to workplace accidents and infections, incurring additional costs. Piel argued that current absenteeism rates do not justify drastic measures, citing OECD data showing no alarming increase in sick leave in Germany compared to other EU countries. IG Metall described Bäte’s proposal as “outrageous,” accusing him of undermining social security and promoting untreated illnesses. Board member Hans-Jürgen Urban said, “Germany’s economy won’t recover by making employees sicker but rather through improved working conditions.”

Calls for Better Management, Not Punishments

The proposal also faced criticism from the private sector. Tobias Stüber, CEO of Flibco, a travel startup, dismissed the idea as harmful, stating, “Employees won’t trust a company that punishes them for getting sick.” He advocated for better corporate policies and leadership that listens to its workforce. However, some experts supported Bäte’s stance. Economist Bernd Raffelhüschen described it as a “sensible proposal” and suggested extending the unpaid waiting period to three days. Mercedes CEO Ola Källenius also voiced support, pointing out that higher absenteeism in Germany compared to other countries has economic consequences.

Mixed Reactions from Politicians

The political response to the proposal was divided. Sepp Müller, deputy chairman of the CDU/CSU parliamentary group, said that while waiting days are not part of the party’s platform, the idea warrants discussion. “Our social systems are under increasing strain, so we shouldn’t dismiss new ideas outright.” However, health policy spokesperson Tino Sorge (CDU) opposed the idea, arguing that “very few people call in sick for fun.” He proposed a summit on sick leave to bring stakeholders together to address the issue. The CDU’s labor union leader Dennis Radtke called Bäte’s proposal “completely unacceptable” and criticized it as promoting a culture of distrust toward employees. The debate over waiting days highlights the tension between reducing costs for employers and safeguarding employee well-being. With unions warning of negative health impacts and some economists advocating for tighter regulations, the discussion remains polarized. Whether or not the government adopts such measures, the topic of absenteeism will likely remain central in the broader conversation about labor and social policies in Germany.

**”The Start of a New Government

is Always an Opportunity”**

As Donald Trump assumes office in the U.S. and Germany prepares for elections, 2025 is poised to bring significant political changes. In an interview with tagesschau24, Clemens Fuest, head of the ifo Institute, shared his thoughts on how Germany can achieve an economic turnaround. Fuest emphasized that the start of a new government always presents an opportunity. However, it is crucial that the new administration implements a clear economic policy shift. If they succeed, Germany’s economic outlook could improve. The major concern, though, is what Donald Trump will do. If a trade war develops between Europe and the U.S., forecasts could turn highly pessimistic, with some even predicting negative economic growth.

Economic Course Correction

Fuest suggested that to achieve more economic growth, Germany may need to cut back on redistribution efforts, including reducing subsidies for the pension system and scaling back ambitious CO2 reduction targets or redistributive policies. He emphasized that thoroughness is more important than speed, warning against short-term, reactionary measures such as reducing VAT or subsidies for electric vehicles. Such measures often provide only temporary relief or unintended consequences.

Job Market Outlook

While layoffs in sectors like automotive, chemicals, and metalworking may continue, other sectors, such as healthcare, are seeing job growth, which can offset some of the losses. Fuest does not expect a sharp increase in overall unemployment due to demographic changes and labor shortages in several sectors. Real wage increases of nearly 3% in the previous year, and expected growth of 4–5% in 2025, particularly in the service sector, should support consumer demand, provided there is sufficient confidence in job security and income.

Despite Economic Crisis: More Start-Ups Founded in Germany

Despite the sluggish economy, the number of start-ups in Germany rose significantly in 2024. In addition to major cities like Berlin, smaller university towns are also becoming increasingly important as start-up hubs. Despite difficult funding conditions for entrepreneurs, 2,766 growth-oriented companies were founded in Germany in 2024—an 11% increase compared to the previous year’s 2,498 start-ups, according to data from the German Start-up Association. 2024 was the second-strongest year for start-up creation, only surpassed by the peak year during the COVID-19 pandemic in 2021.

AI, Education, and Gaming Drive Growth

The software sector saw the highest number of new companies, with 618 start-ups—a 33% year-on-year increase—reflecting the ongoing boom in artificial intelligence. Significant growth was also seen in the education and gaming sectors, which initially slowed after a pandemic-fueled surge but have now rebounded. Times of crisis are also times of innovation. However, the food and e-commerce sectors faced difficulties, with a notable increase in insolvencies. The number of bankruptcies has risen alongside the number of new start-ups, unsurprisingly given the current economic climate.

University Cities on the Rise

While Berlin (498 start-ups), Munich (203), and Hamburg (161) remained the top start-up hubs, other cities have also gained prominence. Measured by start-ups per 100,000 residents, Heidelberg led with 13.5, surpassing both Munich and Berlin. Aachen and Darmstadt also made it into the top five, reflecting the impact of universities and research institutions in fostering local innovation ecosystems. Heidelberg, in particular, has seen numerous start-ups emerge from its university network in recent years.