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Quick Facts
- Population:
- GDP (PPP):
- $4.0 trillion
- 1.5% growth
- 1.2% 5-year compound annual growth
- $48,111 per capita
- Unemployment:
- Inflation (CPI):
- FDI Inflow:
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Germany’s economic freedom score is 74.2, making its economy the 25th freest in the 2018 Index. Its overall score has increased by 0.4 point, with an increase in labor freedom offsetting declines in government integrity, property rights, and judicial effectiveness. Germany is ranked 14th among 44 countries in the Europe region, and its overall score is above the regional and world averages.
Business freedom and investment freedom are strong in Germany. Long-term competitiveness and entrepreneurial growth are supported by openness to global commerce, well-protected property rights, and a sound business regulatory environment. With the political situation in flux late in 2017, the future direction of economic policy was uncertain, but some emphasis on lowering taxes, boosting public investment in infrastructure, and spurring private investment seems likely.
Background
Germany remains the European Union’s most politically and economically influential member nation. Chancellor Angela Merkel’s conservative Christian Democratic Union and its junior partner, the Bavaria-based Christian Social Union, failed to secure an outright parliamentary majority in the September 2017 elections. Coalition talks with the liberal Free Democratic Party and the Greens party fell apart in November, further weakening Chancellor Merkel’s position and raising the possibility of new elections. Merkel’s open-door policy to 2 million migrants beginning in 2015 fueled the rise of the populist Alternative for Germany (AfD) party, which received more than 12 percent of the vote. Germany’s robust economy, the world’s fifth largest and Europe’s largest, is based on exports of high-quality manufactured goods.
Secured interests in property, both chattel and real, are recognized and enforced. German law fully protects the right to property, whether held by German citizens or by foreigners. Germany boasts a robust regime for the protection of intellectual property rights. The judiciary is independent, and the rule of law prevails. Corrupt acts by public officials are vigorously prosecuted and punished.
The top personal income tax rate is 47.5 percent (including a 5.5 percent surcharge). The federal corporate rate is 15.8 percent (effectively above 30 percent with other taxes). The overall tax burden equals 36.9 percent of total domestic income. Over the past three years, government spending has amounted to 44.2 percent of total output (GDP), and budget surpluses have averaged 0.6 percent of GDP. Public debt is equivalent to 67.6 percent of GDP.
The efficient regulatory framework supports entrepreneurial activity, allowing business operation to be as dynamic in Germany as anywhere else in the world. The maximum length of a fixed-term labor contract is two years, but the restriction may be relaxed in some cases. Monetary stability is well maintained, but Germany’s electricity costs are among the highest in Europe because of the government’s commitment to renewable energy.
Trade is significant for Germany’s economy; the combined value of exports and imports equals 84 percent of GDP. The average applied tariff rate is 1.6 percent. Nontariff barriers impede some trade. In general, government policies do not significantly interfere with foreign investment. The financial sector, competitive and largely stable, offers a full range of services. The traditional three-tiered system of private, public, and cooperative banks remains intact.