Germany’s economy flatlined in the third quarter, underlining the continued drag from weaker foreign demand and trade frictions even as inflation pressures eased in several states and the labour market showed only tentative improvement.
Preliminary figures from the federal statistics office on Thursday indicated that gross domestic product (GDP) was unchanged in the three months to September, matching economists’ expectations. The reading follows a 0.3% contraction in the second quarter, when falling orders and softer external demand weighed on industry. Exporters continue to face headwinds from subdued global growth and higher barriers to the US market.
US tariff shock alongside intensified competition from China would keep conditions difficult for Germany’s export-oriented sectors. Order books in key manufacturing niches have thinned over the past year, and firms have reported pressure on margins as they grapple with elevated input costs and pricing constraints abroad. The third-quarter stagnation suggests those pressures have not yet abated sufficiently to restore momentum.
Chancellor Friedrich Merz has pledged to revive growth with higher investment in infrastructure and defence, arguing that faster project delivery and targeted incentives should bolster productivity and demand. However, implementation has been slower than planned, and the macroeconomic effect has yet to appear in the quarterly figures. The current fiscal package is no substitute for structural reforms, including changes to planning rules and permitting, energy policy and costs, and labour-market participation.
Employment data offered mixed signals. The number of people out of work edged down by roughly 1,000 in October to 2.973 million, according to the Federal Labour Office, leaving the seasonally adjusted unemployment rate unchanged at 6.3%. The agency’s head, Andrea Nahles, cautioned against reading too much into a single monthly improvement, noting that employment growth remained weak and that the typical autumn uptick had been “sluggish” so far. The modest October dip follows an August total of 3.02 million unemployed, the highest level in a decade, underscoring the scale of the challenge.
Price developments were marginally more favourable. Preliminary state-level data for October showed inflation easing or holding steady across several of Germany’s largest regions. In North Rhine-Westphalia, the most populous state, annual consumer price inflation was unchanged at 2.3%. Rates slowed to 2.2% in Bavaria and Lower Saxony, and to 2.3% in Baden-Wuerttemberg. While statewide readings do not capture the national basket in full, the pattern points to a possible moderation at the federal level after an upward drift in previous months. Any sustained easing in inflation would help real household incomes and, in time, could support private consumption.
Against this backdrop, the composition of demand remains central. With exports under pressure, contributions from government spending and investment become more important for overall growth. Public-sector outlays on transport networks, digital infrastructure and defence procurement are intended to stimulate activity both directly, through orders, and indirectly, by improving the operating environment for private firms. The pace at which projects move from budget lines to construction sites will determine how quickly these effects filter through to GDP.
Business sentiment and international conditions will also be decisive for the outlook. Germany’s manufacturers remain tightly integrated into European and global supply chains, and any recovery in external demand—particularly from the US and key Asian markets—would help stabilise order flows. Conversely, a prolonged period of elevated trade barriers would reinforce the shift towards domestic and intra-European demand as the principal supports for growth. For now, the third-quarter figures suggest that the external drag has not yet lifted.
Labour-market resilience has been a feature of recent downturns, but the rise in joblessness over the summer highlighted the limits of that buffer. The October data hint at stabilisation rather than acceleration in hiring. Companies are continuing to manage costs carefully, with many retaining core staff while delaying new recruitment. A firmer improvement in demand would likely be needed before employment growth strengthens materially.
The short-term picture is therefore one of stagnation, modest disinflation in several regions, and a labour market that has softened but not tipped into broad-based weakness. The policy mix—higher public investment alongside a stated ambition for structural reform—aims to lift potential growth and reduce bottlenecks. Delivery timelines, coupled with the external trade environment, will determine the speed of any turnaround.
For the moment, Germany enters the final quarter of the year with output broadly flat, export-facing industries still navigating weaker orders and tariffs, and households watching inflation trends for signs of relief. The data published on Thursday offer little evidence of a decisive shift, but they do set the markers against which any late-year improvement will be measured.
