Germany is entering a pivotal moment in its political and economic landscape. With stagnating economic growth and pressing geopolitical challenges, the direction of its next government under Friedrich Merz is significant not only for the nation but also for Europe’s future economic and security prospects. The outcome of the weekend elections mean that a partnership between the CDU/CSU and former Chancellor Olaf Scholz's centre-left SPD appears highly probable, with both parties aligning on key priorities like promoting more business-friendly policies.
What are the strategic implications for investors?
Real Estate: Interest rates remain low, supportive of real estate valuations, but ongoing economic uncertainty will not help investment market liquidity recover quickly from subdued levels. We continue to expect German real estate yields to remain stable in 2025 though we remain optimistic on several sectors within this landscape.
Fiscal Policy Adjustments: A partial relaxation of Germany’s debt brake rule - short of a full repeal - could pave the way for targeted investments in critical infrastructure and defence. With the lowest government debt ratio among major eurozone economies, even a modest loosening of the debt brake could provide a meaningful boost to economic performance.
Energy Policy Evolution: The success of renewable energy deployment and infrastructure expansion is critical to maintaining long-term competitiveness. Investors should monitor breakthroughs in energy storage technologies and policy shifts aimed at accelerating the renewable transition.
Labour Market Dynamics: Reforms aimed at attracting international talent and enhancing digital skills among the domestic workforce will be vital priorities. Investors should assess the implications of labour shortages on sectors such as manufacturing and services.
