German Economy Faces Ongoing Challenges as Recovery Remains Elusive, IW Survey Finds

The German economy continues to grapple with persistent stagnation, as recent survey results from the Cologne Institute for Economic Research (IW) highlight ongoing difficulties and a lack of clear momentum for a turnaround. Despite government forecasts of modest growth, significant obstacles remain for businesses across key sectors, with many firms preparing for further cutbacks in investment and employment.

Prolonged Economic Uncertainty

After two consecutive years without economic expansion, prospects for a strong rebound in Germany remain subdued. Official projections suggest only minimal growth for the current year, following a period in which the gross domestic product (GDP) experienced a decline in the spring and then stagnated in the third quarter. For the upcoming year, the government anticipates a 1.3% increase in GDP, driven primarily by substantial public investments in infrastructure, climate initiatives, and defense. However, business associations have underscored the continued challenges posed by high energy costs, elevated taxes, and rising social contributions. These factors are fueling calls for comprehensive structural reforms to enhance competitiveness.

Survey Results Reveal Muted Business Expectations

The IW's latest survey paints a cautious picture among German companies regarding the outlook for 2026. Only about a quarter of respondents expect increased production or business activity compared to the previous year, while nearly one-third foresee a further decline. The industrial sector remains particularly affected, with ongoing concerns over global trade tensions, geopolitical disruptions, and a weaker international economic environment. Additional risks cited include supply chain vulnerabilities, elevated regulatory and labor costs, and energy price pressures, all of which are undermining the sector's competitiveness.

Private service providers also exhibit cautious expectations for the coming year, citing similar headwinds in the economic environment. In contrast, the construction sector has reported a notable improvement in business conditions, standing out as an exception amid broader uncertainty.

Investment and Employment Plans Under Pressure

The persistent economic challenges are also reflected in company investment strategies. According to the IW survey, 33% of firms intend to reduce their investment budgets in the coming year, while only 23% plan to increase spending. The industrial sector, in particular, faces a deepening investment crisis, which threatens to erode the country's industrial base further if not addressed. Employment trends also signal ongoing difficulties: 41% of industrial companies are preparing for workforce reductions in 2026, compared to just 15% planning to expand staff.

In response to these trends, the federal government has introduced tax relief measures aimed at encouraging greater investment activity among businesses. Despite these efforts, the survey suggests that many companies remain cautious, reflecting broader concerns about Germany's economic outlook and competitiveness in the global market.

As the nation looks ahead to the coming year, the findings underscore the need for sustained policy action and strategic reforms to address structural weaknesses and restore confidence within the business community.