Germany: Economic and Political Overview
In this page: Economic Outline | Political Outline | COVID-19 Country Response
For the latest updates on the key economic responses from governments to address the economic impact of the COVID-19 pandemic, please consult the IMF's policy tracking platform Policy Responses to COVID-19.
Germany is the top economic power in Europe and the fourth globally. After experiencing a historic recession in 2020 due to the outbreak of the COVID-19 pandemic, the country grew an estimated 3.1% in 2021 (IMF) despite the fact that the manufacturing and construction sector have been struggling with supply shortages. Recoveries in private consumption and exports are expected to drive growth in 2022, with a projected GDP growth of 4.6% (IMF). Investment shall also be supported by the implementation of the European Recovery and Resilience Plan. In 2023, GDP is expected to grow by 1.7%, assuming a normalisation of supply and demand dynamics, though much will depend on the global COVID-19 situation.
The unprecedented measures taken to fight the pandemic and stabilise the economy – focused on subsidies to companies, prolongation of the short-time work scheme and increased healthcare spending for vaccination and testing - drove an increase in Germany’s budget deficit, which reached an estimated 5.7% in 2021. The phasing out of measures is set to noticeably reduce the deficit thereafter, to 1.6% in 2022 and 0.3% in 2023 (IMF, although the European Commission forecast is less optimistic, at 2% and 0.5%, respectively). Similarly, the debt-to-GDP ratio grew to reach 72.5% in 2021. However, the country is expected to return on a debt reduction path this year (69.8%) and in 2023 (68% - IMF). Consumer price inflation was estimated at 2.9% in 2021, mostly due to rising commodity and energy prices. In 2022, inflation is projected to ease to 1.5%, before slowing further next year (1.3%). Germany’s current account balance returned to the pre-pandemic level in 2021 and should increase in the upcoming years thanks to the rising demand from the country’s main business partners.
Unemployment was estimated at 3.7% in 2021 (IMF). Hiring expectations and the percentage of businesses reporting labour shortages returned close to or higher than the pre-crisis level, setting the stage for a resumption of employment and wage growth. The IMF forecasts a gradual decrease of unemployment to 3.6% this year and 3.5% in 2023. With a GDP per capita (PPP) of USD 54,263, Germany is among the wealthiest countries in the world (World Bank). Nevertheless, according to data by Destatis, around 17.4% of the country's population is at risk of poverty or social exclusion (latest data available).
| Main Indicators | 2019 | 2020 | 2021 (e) | 2022 (e) | 2023 (e) |
|---|---|---|---|---|---|
| GDP (billions USD) | 3,888.76 | 3,843.34e | 4,230.17 | 4,557.35 | 4,774.08 |
| GDP (Constant Prices, Annual % Change) | 1.1 | -4.6e | 2.7 | 3.8 | 2.5 |
| GDP per Capita (USD) | 46,800 | 46,216e | 50,788 | 54,653 | 57,209 |
| General Government Balance (in % of GDP) | 1.3 | -3.1e | -5.7 | -1.6 | -0.3 |
| General Government Gross Debt (in % of GDP) | 59.2 | 69.1e | 72.5 | 69.8 | 68.0 |
| Inflation Rate (%) | 1.4 | 0.4e | 2.9 | 1.5 | 1.3 |
| Unemployment Rate (% of the Labour Force) | 3.2 | 3.8e | 3.7 | 3.6 | 3.5 |
| Current Account (billions USD) | 289.56 | 266.97 | 287.57 | 316.69 | 343.98 |
| Current Account (in % of GDP) | 7.4 | 6.9 | 6.8 | 6.9 | 7.2 |
Source: IMF – World Economic Outlook Database, October 2021
Note: (e) Estimated Data
The German agricultural sector is rather limited: it contributes a mere 0.7% of GDP and employs 1% of the country’s workforce (World Bank, latest data available). The main agricultural products include milk, pork, sugar beets, potatoes, wheat, barley and cereals. According to the national statistical office Destatis, in Germany there are around 262,776 agricultural holdings, of which the majority are sole proprietorships, meaning that most farmers run their businesses alone or with their families. In recent years, the number of holdings dedicated to organic farming has been growing steadily, reaching 26,133 in 2021. Especially after the outbreak of the COVID-19 pandemic, more and more agricultural holdings have been trying to reduce the risk of strong income fluctuations by diversifying their income: Destatis reports that half of all agricultural holdings in Germany obtained income from agriculture-related activities in addition to primary agricultural production in 2020.
The industrial sector amounts to about 26.5% of GDP and employs 27% of the country’s workforce. Germany is Europe's most industrialized country, and its economy is well diversified: the automotive industry is the country’s largest sector, but Germany also retains other specialized sectors, including mechanical engineering, electric and electronic equipment, and chemical products. Overall, manufacturing activities alone account for 18% of GDP. The industrial activity is concentrated mainly in the states of Baden-Württemberg and North Rhine-Westphalia, where there are more than half of the 1,600 German manufacturing companies identified as global market leaders.
Germany’s service sector is a leading employer (72% of the workforce) and contributes to 63.4% of the country’s GDP. The sector’s growth in recent years has been primarily driven by a strong demand for business-related services and by the development of new technologies, which contributed to establishing whole new branches in the tertiary sector. The accommodation and food services sector also plays an important role, with a total turnover worth EUR 98 billion (Destatis). The German economic model relies heavily on a dense network of small and medium-sized enterprises (SMEs), often very open to the international environment: according to the latest data from Destatis, around 57% of the total employed persons work in SMEs, with the proportion of persons employed in micro-enterprises amounting to 18%, while 22% work in small and 17% in medium-sized enterprises.
| Breakdown of Economic Activity By Sector | Agriculture | Industry | Services |
|---|---|---|---|
| Employment By Sector (in % of Total Employment) | 1.2 | 27.2 | 71.6 |
| Value Added (in % of GDP) | 0.7 | 26.5 | 63.4 |
| Value Added (Annual % Change) | 1.7 | -7.4 | -3.8 |
Source: World Bank, Latest available data.
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The Economic freedom index measure ten components of economic freedom, grouped into four broad categories or pillars of economic freedom: Rule of Law (property rights, freedom from corruption); Limited Government (fiscal freedom, government spending); Regulatory Efficiency (business freedom, labour freedom, monetary freedom); and Open Markets (trade freedom, investment freedom, financial freedom). Each of the freedoms within these four broad categories is individually scored on a scale of 0 to 100. A country’s overall economic freedom score is a simple average of its scores on the 10 individual freedoms.
Economic freedom in the world (interactive map)
Source: Index of Economic Freedom, Heritage Foundation
The business rankings model measures the quality or attractiveness of the business environment in the 82 countries covered by The Economist Intelligence Unit’s Country Forecast reports. It examines ten separate criteria or categories, covering the political environment, the macroeconomic environment, market opportunities, policy towards free enterprise and competition, policy towards foreign investment, foreign trade and exchange controls, taxes, financing, the labour market and infrastructure.
Source: The Economist Intelligence Unit - Business Environment Rankings 2021-2025
See the country risk analysis provided by Coface.
Federal elections were held in September 2021: while incumbent chancellor Angela Merkel decided not to run again, the Social Democratic Party of Germany (SPD) obtained 27.5% of total votes, becoming the main party in the Bundestag with 126 seats. The CDU/CSU recorded their worst ever result with 24.1%, followed by the Alliance 90/The Greens, which reached 14.8%. In December 2021, the leaders of the Social Democrats, Greens and the Free Democrats met in Berlin to officially sign their three-party coalition deal.
Meanwhile, SPD’s representative Olaf Scholz has been sworn in as Germany's new chancellor with the vote of 395 out of 736 delegates, formally taking power after Angela Merkel's historic 16 years as leader.
The Head of State is the President, elected for a five year term by the Federal Convention (which includes the members of the Federal Assembly and an equal number of delegates elected by the provincial legislatures). The role of the President is largely ceremonial.
The world rankings, published annually, measures violations of press freedom worldwide. It reflects the degree of freedom enjoyed by journalists, the media and digital citizens of each country and the means used by states to respect and uphold this freedom. Finally, a note and a position are assigned to each country. To compile this index, Reporters Without Borders (RWB) prepared a questionnaire incorporating the main criteria (44 in total) to assess the situation of press freedom in a given country. This questionnaire was sent to partner organisations,150 RWB correspondents, journalists, researchers, jurists and human rights activists. It includes every kind of direct attacks against journalists and digital citizens (murders, imprisonment, assault, threats, etc.) or against the media (censorship, confiscation, searches and harassment etc.).
Source: World Press Freedom Index, Reporters Without Borders
The Indicator of Political Freedom provides an annual evaluation of the state of freedom in a country as experienced by individuals. The survey measures freedom according to two broad categories: political rights and civil liberties. The ratings process is based on a checklist of 10 political rights questions (on Electoral Process, Political Pluralism and Participation, Functioning of Government) and 15 civil liberties questions (on Freedom of Expression, Belief, Associational and Organizational Rights, Rule of Law, Personal Autonomy and Individual Rights). Scores are awarded to each of these questions on a scale of 0 to 4, where a score of 0 represents the smallest degree and 4 the greatest degree of rights or liberties present. The total score awarded to the political rights and civil liberties checklist determines the political rights and civil liberties rating. Each rating of 1 through 7, with 1 representing the highest and 7 the lowest level of freedom, corresponds to a range of total scores.
Political freedom in the world (interactive map)
Source: Freedom in the World Report, Freedom House
To find out about the latest public health situation in Germany and the current sanitary measures in vigour, please consult the website of the Federal Ministry of Interior. Further information is available on the German Federal Institute for Risk Assessment (BfR) website, as well as on the dedicated portal of the Ministry of Health and on that of the Federal Center for Health Education (BZgA) (in German). Measures for containing the spread of the coronavirus in Germany may also be subject to local regulation, hence it is recommendable to consult local sources too for Länder-specific information.
For the information on the economic recovery scheme put in place by the German government to address the impact of the COVID19 pandemic on the national economy, please visit the website of the Federal Ministry of Finance. Further details can be found on the dedicated page on KPMG's website.
The information on the EU’s economic response to COVID-19 and the actions to minimise the fallout on the EU member states’ economies of the COVID-19 outbreak is available on the websites of the European Commission and the European Council.
For the general overview of the key economic policy responses to the COVID-19 outbreak (fiscal, monetary and macroeconomic) taken by the German government to limit the socio-economic impact of the COVID-19 pandemic, please consult the section dedicated to Germany in the IMF’s Policy Tracker platform.
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