“Not normal in the long run”: IW study: Without massive government spending, GDP would have shrunk

In the last six years, Germany's economy has only grown by an average of 0.2 percent annually. But mathematically, this increase is solely due to government spending. Companies are holding back, especially in the construction sector and when modernizing machines.

In the years 2020 to 2025, the German economy barely grew - just a tiny 0.2 percent per year. In mathematical terms, companies and private households have not contributed anything to this growth over the last six years. This emerges from a study by the German Economic Institute (IW), from which the “Süddeutsche Zeitung” quoted in advance. Germany's small GDP increase is solely due to the fact that the state has spent a lot of money - for example on the Bundeswehr, climate protection and infrastructure. Without these billions from the state, Germany's economy would have even shrunk.

The extremely weak development of the private sector is due to low corporate investment, the negative effect of which could not be completely offset by private household consumption. In particular, spending on residential and commercial buildings as well as on machinery and vehicles fell sharply. The reasons were business slumps as a result of the corona pandemic, supply chain problems, uncertain financing conditions, trade conflicts and geopolitical shocks such as the Russian attack on Ukraine. The only bright spot was spending on research and development as well as software and databases, which increased significantly.

It is not a new finding that the German economy is suffering from a massive reluctance to invest on the part of companies. However, the study by IW economic expert Michael Grömling makes it clear how deep the problem is: According to this, public investments in the second quarter of 2026, adjusted for prices, were around 20 percent above the annual average of 2019, while private sector investments were more than ten percent below. According to the IW economic expert, this is “not normal in the long term for a market-based economic system” and is not just a problem from an economic point of view.

The data also showed that machines and systems in Germany have recently not been sufficiently modernized. “This weakens the economic production possibilities and the resulting prosperity for years to come,” warned Grömling. In order to secure prosperity, in addition to government investments and consumer spending - for example for education - "economic and growth impulses from private sector investment activity are also urgently needed."