By Maria Martinez
BERLIN (Reuters) – With global trade deeply uncertain and a tariff war causing havoc on financial markets, Germany’s next government is hoping to unleash domestic consumption to revive stalled growth in an economy that has been driven for decades by exports.
Conservative chancellor-in-waiting Friedrich Merz, in a newly forged coalition with the centre left Social Democrats (SPD), has announced policies such as tax cuts and raising the minimum wage.
He hopes these measures will increase purchasing power and support domestic demand. However, economists, retail groups and consumer behaviour experts question whether they will be enough to persuade Germans – already among the world’s biggest savers – to break open their piggy banks and spend.
“I doubt that we will really see a sharp consumption revival this year,” Carsten Brzeski, global head of macro told Reuters.
Germany’s attempts to wean itself off its exports dependency predate the trade turmoil unleashed by the Trump administration, as it has long struggled to deal with declining competitiveness.
Since 2023, domestic consumption has been stagnant however, with the household savings rate reaching 20% last year due to political uncertainty, above the EU average of 15%.
To avoid a third year of contraction in 2025, economists agree that boosting consumption in Europe’s biggest economy is crucial.
“Looking at it in a very simple way you can say, okay, there is a fall in demand for our export goods, so we have to strive for more domestic demand, which is investment and consumption,” Cyrus de la Rubia, chief economist at Hamburg Commercial Bank AG, told Reuters.
Merz’s coalition has agreed to lower income taxes for middle and lower income households, which could help consumption, the German retail association HDE told Reuters. “However, we do not expect a significant upturn.”
The government will make overtime pay tax-free and offer tax benefits for those working beyond retirement age. The minimum wage is expected to rise to 15 euros ($17.10) per hour and the value-added tax (VAT) on food in restaurants will be lowered to 7% from a current 19%.
Deutsche Bank, however, said these “miscellaneous fiscal gifts” will provide only limited relief in the near term.
Since unveiling the measures, Merz’s coalition has started bickering about the contents of the agreement, with Merz warning that tax cuts would only happen if there was enough money in the budget.
Moreover, the measures would likely take time to change household habits, Salomon Fiedler, an economist at Berenberg, told Reuters.
