Germany Faces Headwinds In 2025: Goldman Sachs

Germany’s economy, which has lagged behind its peers in recent years, faces a series of headwinds in 2025, Goldman Sachs said recently. Goldman Sachs is a leading global investment banking, securities, and asset and wealth management firm.

The headwinds Germany face include trade uncertainty with the US, still-high energy prices, and growing competition from China. Elections in February will provide an opportunity to tackle the country’s challenges. According to Goldman Sachs Research, Europe’s largest economy is forecast to expand 0.3 per cent in 2025, which is slower than the estimate for the euro area of 0.8 per cent and for the UK of 1.2 per cent. The country’s real (inflation-adjusted) GDP is unchanged since the fourth quarter of 2019.

For all the challenges, there are also signs of German industry finding ways to adapt. “Even though industrial production is down significantly over the last few years, the amount of value added has actually been much more stable,” said Goldman Sachs Research chief European economist Jari Stehn. “German companies have been able to respond by moving out of relatively low-margin production in chemicals or paper, and so on, into higher value production. I think the way forward essentially is for German companies to continue to do that.”

Since the end of 2019, while GDP in Germany has been flat, while the rest of the euro area has grown by 5 per cent and the US 11 per cent. Stehn attributed stagnation in Germany to three factors. “One is the energy crisis that hit Germany particularly hard since it was so reliant on Russian pipeline gas... So it’s natural that the increase in energy prices had a bigger effect on Germany than on other countries.”

Second, he said, Germany is highly exposed to China. This was a big asset in the past because China was growing a lot. “But over the last few years growth in China has slowed, so Germany has sold fewer goods into China. Also, China has become more of a competitor over time.”

Third, Germany has a number of broader structural issues, such as the degree of regulation that business startups face and public underinvestment. Cumulatively over the last few years, they have put Germany in a less competitive position, Stehn said.