It appears unlikely that Germany will move radically to boost growth after the upcoming federal elections, but such a move is needed to take the world's third largest economy out of its torpor.

German voters – all 60 million of them – await results of the federal elections with results due on 23 February. The country is the largest economy in Europe, although in lacklustre shape. The outcome of this poll will be closely watched.

Chancellor Olaf Scholz called a snap election in December last year after losing a vote of confidence.

The country, which faces complaints about immigration, crime, the state of infrastructure, deindustrialisation, and how to handle Russia, remains a pivotal one. Investors will watch to see whether, for the example, the hard right party, AFD, will gain ground, perhaps tapping into the worries and resentments that have taken continental European politics to the right in a number of countries, such as Italy and Austria. 

This nation needs to grow its economy. The European Union reckons German GDP is expected to have contracted by 0.1 per cent in 2024. For 2025, the government in Berlin has cut GDP growth forecasts to a mere 0.3 per cent. For someone like your correspondent, who spent happy months as a student in what was West Germany in the early 1980s when that country appeared so much richer than the UK, such figures come as a jolt. 

And while economic growth is not the only game in town, the fact that the motor of much European business since the early 1950s is in trouble has implications for wealth managers. A sluggish economy is unlikely to produce many new HNW individuals. A recent report by Statista has said that by 2024, the number of billionaires in Germany is set to reach 147; the number of HNW individuals in the country is pegged at 2,702,294, rising from 1,697,949 in 2014. The chart below shows that growth has continued over the past 10 years in the number of HNW individuals, although bear in mind that the value of money has eroded over that time, so unless the definition of “HNW” is adjusted, such data possibly overstates growth of real wealth.

Source: Statista

As noted here and here in features we published about Germany’s family offices sector, this is a country in which big wealth tends not to be flaunted in the same way as, say, the US. That said, the cluster of family offices, private banks and wealth managers, particularly in states such as Bavaria, is large. If HNW growth remains slow or economic problems aren’t quickly tackled, the sector will likely experience attrition. This will be a trend that players such as Deutsche Bank and Commerzbank, for example, will watch closely. Certain banks see Germany as an important wealth play in the medium-term, regardless of what near-term problems exist. (See this article about BNP Paribas in Germany, for instance.)

What might happen?
Franklin Templeton, the US-headquartered asset manager, reckons the top issues in this election are anaemic economic growth, weak productivity, the constitutional obstacle to issuing debt (which is needed for public investment in infrastructure and defence) and Germany’s vulnerability to potential tariffs on exports to the US at a time of worsening EU relations with China. Unlike in 2021, when climate change was a big issue, peace, security and the economy are the priorities now.

The fund manager thinks some form of “debt brake reform” will take place, if not as far as capital markets want to see. It expects a special purpose fund (or funds) that could be quickly launched to allow higher spending on defence, infrastructure and energy requirements. The firm said investors expect lower corporate tax and stable electricity costs for industrial customers – but points out that structural changes take time, with benefits only working from 2026 onwards.

As far as Franklin Templeton is concerned equity investors are focused on the CDU/CSU proposals to cut the corporate tax rate from 30.8 per cent to 25 per cent over four years – this could boost earnings for equities by 1.1 per cent in 2027 and up to 1.9 per cent. And this is good news for defence, utilities, capital goods, autos, property and, to a lesser extent, banks and chemicals.

For wealth managers perhaps used to “winner-take-all” elections, rather than proportional representation, as in Germany, the outcome might appear underwhelming. Coalitions may take weeks to cobble together. There are 41 political parties, of which 10 presented candidates in every constituency. As Franklin Templeton notes, the Christian Democrats (CDU) and Social Democrats (SPD) are expected to garner 46 per cent of the votes cast; a third partner could be the Green Party. And there is the AFD, currently polling at 20.7 per cent, according to Reuters yesterday.

It is not clear at the time of writing  whether Germany will embrace radical reform. It may be that the country tries to cut corporate tax rates, eases debt rules to allow more spending on infrastructure and defence, for example. Given the calls on Europe from the Trump administration to hike defence spending, defence-related sectors may benefit. 

There is no real sign at this juncture of a big shift in policy but like with many other countries, a big theme appears to be “growth.” The driving force of west Europe’s economy since the 1950s, Germany matters a lot. While the dramas in Washington DC tend to dominate so many conversations, a focus on Berlin makes sense.