• 1000

The current state of the German economy is still very much shaped by the Covid-19 pandemic. With global supply bottlenecks in intermediate products holding back domestic industry despite strong domestic and foreign demand, the German economy is struggling to push economic output beyond 2% growth in 2021. Gross domestic product (GDP) rose by just 1.8% in Q3 vs. Q2 2021. Accordingly, exports have also lost momentum and are expected to remain static for the time being.

real GDP growth expectation

The ifo Business Climate Index (ifo institute 2021) also points towards contraction, remaining well below the 100 point mark. In November, the index fell to 96.5 points, down from 97.7 points in October. This represents the fifth decline in a row, indicating deteriorating optimism in companies’ short-term business outlook. Companies’ assessments of their current situation are also less positive, and capacity utilisation in manufacturing is falling.

As a result, we have adjusted our forecast for GDP growth in 2021 down to 2.1%.

The recovery in Germany will stagnate during the winter season since the service sector will remain below usual activity levels because of soaring new infections. As at November 2021, the vaccination program had delivered doses to more than 71% of the population, with only about 68% now being fully vaccinated. In total, around 118 million doses have been administered so far. Since September, booster vaccinations have been offered to people in need, though numbers remain worryingly low. To date, just over 6 million people have received this additional vaccination.

Furthermore, geopolitical and policy risks remain, and may continue to jeopardise the return to pre-crisis economic growth patterns. These risks include rising interest rates in the US and the euro area and continuous supply chain disruptions leading to shortages of essential goods and services in Germany.

German economy to grow by 2.1% in 2021, accelerating to about 4.8% in 2022

After GDP contracted by 4.9% in 2020, we expect economic output in Germany to expand by 2.1% year on year in 2021.

Following the pandemic-related decline in economic performance at the beginning of 2021 (-2.1% in Q1), higher household consumption and government spending are slowly ramping up the recovery, with growth figures of +1.5% in Q2 and +1,8% in Q3. Industrial production in Germany had already shrunk by 1.3% in Q2 2021, and the Ifo Institute expects another decline in the third quarter. The situation may not ease until the end of the year, according to predictions. Economic output will thus grow by only 2.1% this year.

Infographic GDP Forecast

Once the pandemic has been brought under control globally and the newly formed government has started delivering on its investment promises, a significant increase in economic growth can be expected for 2022 – after all, existing orders must be processed, and supply chain disruption will resolve over time. We expect the German economy to grow by around 4.8%. This would represent the largest growth since the reunification of East and West Germany more than 20 years ago.

Germany’s economic growth is being further fuelled by the strong global recovery in 2021, especially in the overseas markets most important for Germany – namely the United States and China. China had already returned to its pre-pandemic production levels by the end of 2020, whereas for the US the rebound to 2019 levels did not come until the middle of 2021. In 2022, the US and China are expected to expand by up to 2% and around 5.6% respectively.

In the second quarter of 2021, GDP increased by 2.1% in the euro area. Compared with the same quarter of the previous year (Q2 2020), euro area GDP increased by 14.2%. Despite the robust rebound in the second quarter, the eurozone economy remains some 3% smaller than it was at the end of 2019, unlike the US and Chinese economies, which have pulled above their pre-pandemic peaks. Among the eurozone's largest economies, the Netherlands and Italy posted the largest GDP rises, growing by 3.8% and 2.7% respectively on the quarter according to Eurostat data.

Infographic Foreign Trade

Germany remains top trading nation in Europe

The global pandemic had a direct and significant impact on the export-oriented German economy in 2020. Global demand for products manufactured in Germany fell sharply in 2020. For Germany, the coronavirus pandemic in 2020 caused the largest decline in import and export volumes since the financial crisis in 2009. In total, Germany exported goods worth around 1.2 trillion euros and imported goods worth around 1.0 trillion euros in 2020. Exports fell by 9.3% and imports by 7.1% in a year-on-year comparison with 2019.

The decline in trading volumes was driven by both reduced demand and disruption to global supply chains owing to the pandemic and to geopolitical developments.

This is also partly the result of Brexit, which led to a decline in German exports to the United Kingdom. Germany had previously been the UK’s most significant source of imports since modern records began in 1997, except for six months at the end of 2000 and start of 2001, when the UK imported more from the United States. According to the UK’s Office for National Statistics, imports from Germany have been in decline since April 2019, which coincides with increased Brexit uncertainty. China replaced Germany as the UK’s largest source of imports in spring 2020 for the first time on record, as the spread of Covid-19 raised demand for Chinese textiles used for face masks and PPE. Exports from Germany to the United Kingdom fell by 12.5% year on year to €5.7 billion in October 2021.

The global economic recovery in 2021, mainly driven by China and the US, is boosting the German export economy. In September 2021 alone, Germany exported goods valued at 117.8 billion euros (decrease of 0.7% on previous month) and imported goods valued at 101.6 billion euros (increase of 0.1% on previous month). While exports nearly returned to pre-coronavirus pandemic levels in July, they exhibited strong growth of 7.1% on September 2020; imports rose respectively by 12.9%. As the Federal Statistical Office (Destatis) further reports based on preliminary results, exports were 0.3% lower and imports 7.8% higher in calendar- and seasonally adjusted terms than in February 2020, the month before the start of the coronavirus pandemic restrictions in Germany.

Germany is still considered to be one of the most international economies in the world. Exports account for approx. 50% (43.8% in 2020) of annual GDP, making Germany one of the three largest trading nations in the world. China reclaimed the title of the world's largest exporter in 2020 (2.5 trillion US dollars), with the United States in a distant second place with exports of approx. 1.6 trillion US dollars followed by Germany with exports of 1.5 trillion US dollars.

For further information on transatlantic trade flows please visit "Umschwung im Weißen Haus – mehr Berechenbarkeit für transatlantische Handelsströme".


The upswing is supported by the development on the labour market. According to the Ifo forecast, the number of unemployed should fall to 2.6 million this year, to 2.4 million in 2022 and 2.3 million in 2023. The decline in short-time work will also continue.

According to the German Federal Employment Agency, approx. 2,377,000 million people are currently unemployed in Germany. The unemployment rate fell to 5.2% in October 2021, a decrease of 0.2% from the previous month, which was 13.9 percentage points lower than in October 2020 and further below the pre-crisis rate. The unemployment rate is expected to decline further in the course of 2021 as the shortage of skilled labour continues to weigh heavily on the labour market.

Infographic Unemployment Rate

Based on a forecast from the German Institute for Employment Research (IAB), those hardest hit by the crisis are mini-jobbers and the self-employed. For 2021, the IAB expects an average decline of 150,000 in the number of self-employed, falling to 3.8 million. This would be the lowest level since the mid-1990s. For people employed exclusively in a mini-job, the researchers expect a decline of 200,000 to 4.6 million people. As a result, it can be assumed that the effects of the coronavirus crisis will be felt most by those on low incomes.

That said, the rise in unemployment in Germany and other European countries has proven to be moderate by international comparison. This is because employers made extensive use of short-term work programmes and government subsidies during the coronavirus crisis. 

The pandemic led to many employees being put on short-time work, with a maximum of over 6 million people working reduced hours in April 2020. According to the ifo institute, the number of people on short-time work is continuing to fall, but the pace of decline has slowed. In October, there were 504,000 people left on short-time work, down from 610,000 in September, 694,000 in August and 1.07 million in July. Short-time work rose in the industrial sector, countering the trend. This is the estimate of the ifo Institute based on its surveys and figures from the Federal Employment Agency.

Infographic Inflation Rate

Private consumption and investment

The inflation rate in Germany, measured as the year-on-year change in the consumer price index, is expected to be around 4.5% in October 2021, according to the German Federal Statistical Office. The last time there was a higher inflation rate was December 1993, when +4.6% inflation was recorded. Annual CPI inflation equalled 4.1% in September 2021 and 3.9% in August. As further reported by the Federal Statistical Office (Destatis), consumer prices In October 2021 rose by 0.5% compared with September after remaining unchanged between August and September. The rise in inflation in October 2021 is due to the base effect resulting from the coronavirus-related reduction in VAT in July 2020 and the associated fall in prices for goods and services. In addition, crisis-related effects, such as supply bottlenecks and the significant price increases at upstream economic stages, are increasingly having an impact and are also reflected in the consumer price index.

Today’s inflation in Germany is mainly driven by four factors:

  1. VAT returned to the previous rate of 19% as at January 2021 after having been reduced for a period of six months. VAT rates were temporarily lowered last year as a means of boosting purchasing power.
  2. A carbon tax was introduced at the beginning of 2021. An amount of 25 euros per ton of carbon dioxide (CO2) is now levied on emissions of diesel, petrol, heating oil and natural gas. Consequently, heating costs, mineral oil and petrol prices have risen. At +101.1%, prices for heating oil doubled within a year, and petrol became more expensive as well (+35.0%). Prices for natural gas (+7.4%) and electricity (+2.5%) also increased.
  3. As well as energy product prices, prices for food increased at an above-average rate of +4.4% year on year in October 2021. Thus, the year-on-year price increases for energy products and food had a significant impact on the inflation rate: excluding energy products, the inflation rate in October 2021 would have been +3.1%; excluding both sectors, it would have been just +2.9%.
  4. Following the end of lockdowns around the world, global demand and private consumption have been pushing prices upwards. As a result, services became 2.4% more expensive within the year, due to the large share of private household consumption expenditure.  

Your contact persons

Stay up to date with what matters to you

Gain access to personalized content based on your interests by signing up today

Sign up today

Connect with us