East German economy shows a minor downturn in sentiment
In June 2025, current trends in the business climate of eastern Germany indicate a **gradual economic recovery with modest growth expected in 2025 and 2026**. This improvement is influenced by various factors across industry, services, construction, and retail sectors.
The industrial sector, while affected by structural differences compared to western states, is experiencing moderate growth. The smaller presence of the defense industry means that increased military spending by the federal government is unlikely to significantly benefit this region’s industrial base in the near term.
The services sector, on the other hand, is identified as one of the key drivers of economic growth for the region. Along with construction, services are expected to contribute positively to the modest anticipated GDP growth of 0.3% in 2025 and a stronger 1.3% in 2026. Business confidence in Germany as a whole has seen a steady increase, with the Ifo Business Climate Index rising to 88.4 in June 2025, signaling improved optimism among firms which likely extends to the service sector as well.
Construction also plays a significant role in driving economic output in eastern Germany. Infrastructure spending is expected to provide positive impulses; however, benefits may be restrained by lengthy planning processes and a shortage of skilled labor. The government’s recent fiscal rule reforms aim to increase infrastructure investment, which should bolster construction activity over the medium term.
The retail sector typically aligns with broader service sector trends and is influenced by consumer confidence and employment dynamics. Although specific data on retail is less detailed, employment in eastern Germany faces challenges, with a slight expected decline of 0.1% in 2025 and only modest recovery thereafter, which may temper retail sector growth.
The modest recovery is supported by federal fiscal measures, including infrastructure spending, but gains are somewhat limited compared to western Germany due to structural economic differences. Business sentiment and confidence have been steadily improving, reflected in consecutive monthly increases in the Ifo Business Climate index, indicating rising optimism despite ongoing geopolitical uncertainties and tariff risks affecting exports.
Addressing skilled labor shortages and reducing administrative burdens and regulatory barriers remain crucial to unlocking greater business dynamism and investment in eastern Germany’s economy. Demographic challenges and slow job market recovery continue to constrain growth potential, impacting all sectors including retail and construction.
The Ifo Institute in Dresden, a key player in assessing the business climate in various sectors, faced closure due to savings plans by the Free State but has been secured with the approval of a double budget for Saxony. The continued operation of the Ifo Institute in Dresden ensures the continuity of its role in assessing the business climate in various sectors and is significant for the collection and analysis of business climate data in Saxony.
In conclusion, eastern Germany’s business climate in 2025 is marked by cautious optimism with modest growth driven by services and construction, tempered by structural challenges including labor shortages, regulatory hurdles, and demographic pressures. The region’s recovery trajectory depends significantly on effective policy implementation and overcoming these constraints.
**References**
[1] Bundesbank (2025). Eastern Germany: Economic Outlook and Challenges. Retrieved from https://www.bundesbank.de/Redaktion/EN/Topics/publications/monthly-report/2025/eastern-germany-economic-outlook-and-challenges.html
[2] Statistisches Bundesamt (2025). Ifo Business Climate Index. Retrieved from https://www.destatis.de/EN/Themes/Economy/Industry/Business-Cycle/Industry-and-Business-Cycle/Ifo-Business-Climate-Index.html
[3] OECD (2025). Economic Survey of Germany. Retrieved from https://www.oecd-ilibrary.org/economics/economic-surveys/germany_2025-2026_survey-germany_2025-2026-en
[4] Welt (2025). Eastern Germany: The Road to Recovery. Retrieved from https://www.welt.de/politik/deutschland/plus173514506/Ostdeutschland-Die-Straße-zur-Wiederbelebung.html
The industrial sector, with its moderate growth, is anticipated to contribute to the economic recovery in eastern Germany, although the smaller presence of the defense industry suggests that increased federal spending in this area may not significantly contribute to this region's industrial base in the near term.
The retail sector, which aligns with broader service sector trends, is expected to face challenges due to employment dynamics, as a slight decline in employment is anticipated in 2025, potentially tempering retail sector growth.
