German economy grows, inflation stabilizes, Bundesbank loss halves
Bundesbank President Joachim Nagel presented the Annual Report 2025, highlighting slight growth in the German economy and stabilized euro area inflation at 2 percent. The Bundesbank's annual loss for 2025 more than halved to €8.6 billion.
Germany's economy finds modest footing
After two years of contraction, the German economy grew slightly by 0.3 percent in 2025, primarily driven by increased consumption.
Exports continued to decline due to a deteriorated international competitive position, higher energy prices, and new US tariffs.
Bundesbank President Nagel welcomed the provisional implementation of the Mercosur agreement as a step towards new partnerships to help German foreign trade regain momentum.
The domestic economy is expected to slowly recover in 2026, boosted by additional public sector spending on defence and infrastructure, and rising household demand fueled by strong wage growth.
Expansionary fiscal policy is projected to add 1.3 percentage points to economic growth until 2028.
However, accompanying structural reforms are crucial for a steeper, longer-term growth path, with initiatives already underway to reduce bureaucracy and speed up administrative processes.
Nagel emphasized Germany's underlying strengths, including stable institutions, excellent research, adaptable enterprises, and highly skilled people, which could create new momentum if growth obstacles are removed.
Euro area inflation stabilizes at 2 percent
Price stability now prevails in the euro area, with inflation around 2 percent for both Germany and the wider bloc, a success attributed to decisive ECB Governing Council action.
Key interest rates were raised ten times between July 2022 and September 2023, peaking at 4 percent, then lowered between June 2024 and June 2025, bringing the deposit facility rate to its current 2 percent.
This rate reversal did not trigger a recession.
In Germany, HICP inflation averaged 2.3 percent in 2025, with core inflation at 2.8 percent.
Services inflation, however, remained elevated at 3.9 percent due to strong wage growth, contributing to persistent public concern about inflation.
The ECB Governing Council is determined to sustainably stabilize inflation at its 2 percent target in 2026, noting the current key interest rate level is well positioned.
The volatile situation in the Middle East, especially its impact on energy prices, requires careful analysis before drawing monetary policy conclusions, with vigilance against second-round effects.
The next ECB Governing Council meeting will discuss the latest data and projections.
Bundesbank's balance sheet: A long exposure
The Bundesbank's financial health, while sound, remains under pressure from legacy asset purchases, leading to continued negative net interest income.
Despite a halved annual loss of €8.6 billion in 2025, the accumulated loss now stands at €27.8 billion, reflecting a prolonged period of financial burdens.
While these losses are temporary and the peak is past, profit distributions are not expected for a longer period, underscoring the enduring impact of past monetary policy measures on central bank balance sheets.