Germany’s economy faces sustained pressure in 2025, burdened by structural challenges, geopolitical uncertainties, and rising global protectionism. Productivity has been weakened by a declining working-age population, inadequate public investment – the lowest among advanced economies according to the IMF – and the loss of cheap Russian gas.
Technological stagnation exacerbates these issues, with Germany trailing the U.S. and China in digitalisation and electric vehicles. Bureaucratic inefficiencies and lack of innovation have left its economy struggling to keep pace with the application of advanced technologies. Trade disputes and the upcoming elections add further uncertainty to the direction of fiscal, economic, and immigration policies.
These factors have eroded Germany’s once-dominant industrial and manufacturing sectors, undermining its export-led growth model, now widely considered “broken”. Without significant fiscal reform, economic stagnation appears inevitable, irrespective of the outcome of the upcoming Bundestag elections in February.
Germany’s GDP has stagnated since 2018 (excluding outliers during the pandemic years), with contractions in 2023 and 2024, marking the first consecutive years of negative growth since the early 2000s. Europe’s largest economy is forecast to barely grow in 2025. The Bundesbank has sharply downgraded annual GDP forecasts from 1.1% seen last June, to just 0.2% in its December revision. Goldman Sachs similarly anticipates around 0.3% in growth, notably slower than the 0.8% estimate for the euro area and the 1.2% for the UK. Forecasters warn the economy would perform much worse if US trade tariffs materialise.
Goldman quantified these risks. Its base case is a sharp increase in trade tensions, but ultimately actual tariffs are limited to the auto sector, which implies a significant hit for Germany. Goldman estimates a 0.6% hit to the level of GDP. However, in the downside scenario, where Trump imposes across-the-board tariff on all European imports, the negative effects would be twice as large.
“Either way, we think there is going to be a pronounced period of uncertainty, and that uncertainty will weigh on confidence and investment,” explains Jari Stehn, Chief European Economist, at Goldman Sachs Research.
Chart 1: Outsized Impact of US tariffs on Germany GDP in 2025
Source: Goldman Sachs Research, Haver Analytics
Longer-term growth is expected to remain below 1%, including 0.8% and 1.0% in 2026 and 2027, respectively, according to the Bundesbank. Inflation will ease slightly in 2025, with headline inflation expected to decline to 2.4% and core inflation (excluding energy and food) falling from 3.3% in 2024 to 2.4%. However, food and services price pressures will slow the return to the 2% inflation target. A fiscal crisis looms, with tax revenues estimated to fall €58.2 billion short of projections over the five years to 2028, driven by declines in payroll, corporate, and sales taxes.
These systemic pressures have directly impacted borrower stability, leading to heightened financial distress, particularly in commercial real estate (CRE) and corporate sectors. The non-performing loan (NPL) market in Germany reflects these challenges, with 2025 set to be a pivotal year for distressed debt transactions.
German NPL Review 2024: Gradual Deterioration Masking H2 Weakness
Germany’s non-performing loan (NPL) ratio for loans to non-financial corporations has edged up slightly in recent quarters, reaching 3.1% by the first quarter of 2024, according to the latest Bundesbank data. This uptick is primarily attributed to loans secured by commercial real estate, exacerbated by a significant decline in collateral values due to the real estate market’s downturn.
Chart 2: NPLs in the German banking sector
Source: Bundesbank
However, this gradual uptick in NPLs masks significant deterioration in credit quality during the second half of the year:
number of insolvencies since 2009, affecting nearly 38,000 jobs, according to a study by the Halle Institute for Economic Research (IWH). While painful, these insolvencies are seen as necessary market adjustments to clear unsustainable companies, creating opportunities for stronger firms. “For years, extremely low interest rates and pandemic subsidies masked insolvencies,” says Steffen Müller, head of IWH insolvency research. “Now, the necessary clean-up is happening.”
- CRE Sector Crisis: In the third quarter of 2024, German commercial property prices fell by 4.7% compared to the same period a year earlier, according to the Association of German Pfandbrief Banks (VDP). Rising interest rates and declining valuations drove developer defaults, with non-performing CRE loans increasing by 56% year-on-year, reaching €9.7 billion.
Rising Insolvencies: Corporate German insolvencies surged to 14,590 in 2024, a 16.7% year-on-year increase, the highest since the financial crisis. Sectors like construction and industrial manufacturing were hit hardest. In Q4, Germany recorded the highest number of insolvencies since 2009, affecting nearly 38,000 jobs, according to a study by the Halle Institute for Economic Research (IWH). While painful, these insolvencies are seen as necessary market adjustments to clear unsustainable companies, creating opportunities for stronger firms. “For years, extremely low interest rates and pandemic subsidies masked insolvencies,” says Steffen Müller, head of IWH insolvency research. “Now, the necessary clean-up is happening.” - Corporate Distress to Peak in Summer: Germany remains Europe’s most distressed market for the second consecutive year, according Weil, Gotshal & Manges, caused by deteriorating investment fundamentals, liquidity and valuations. The firm, which publishes the Weil European Distress Index, warns that corporate distress could peak in the summer of 2025 before easing toward year-end, potentially surpassing levels seen during the pandemic if supply chain disruptions, trade protectionism, or geopolitical conflicts intensify.
- Banking Sector Stress: The proposed merger between Commerzbank and UniCredit adds another layer of uncertainty to the financial markets. Concern centres on the diminished likelihood of a friendly merger and unintended consequences if a hostile takeover is successful, such as leading to Commerzbank losing SME clients, or negative impacts on the broader German economy and financial stability. There are also potential implications for lending capacity and NPL management strategies of the merged banks. Separately, Deutsche Bank raised its loan-loss provisions to €1.8 billion in Q4, reflecting growing concerns over defaults in CRE and corporate lending.
- Regulatory Delays: The implementation of the EU Credit Servicer Directive created uncertainty, leading to the postponement of several portfolio sales to 2025.
These developments underscore the worsening financial strain across Germany’s economy, setting the stage for a challenging 2025.
German NPL Outlook 2025
Germany’s NPL volumes are projected to rise from €40.2 billion at the end of 2024 to €41.0 billion by the close of 2025, according to the NPL Barometer, a survey of risk managers in leading German credit institutions, supports these projections. NPL stocks grew modestly by €1.33 billion in Q2 reaching €356 billion, according to the European Central Bank (ECB). However, this gradual rise likely understates the deteriorating credit quality seen in the second half of the year, as anecdotal evidence points to significant financial stress across commercial real estate (CRE) and corporate lending.
CRE Sector Pressures
The CRE sector continued to face sharp declines in property values and rising developer defaults, as elevated borrowing costs continues to squeeze corporate and CRE borrowers, particularly for sponsors with variable rate loans or financing near maturity. The domestic CRE crisis is expected to deepen, with elevated borrowing costs and declining valuations pushing more developers toward default. Banks and debt funds with CRE loan exposures will face mounting pressure.
Corporate Lending Stress
The sale of promissory note loans (Schuldscheine) significantly increased in 2024, as evidenced by restructurings involving VARTA AG, Helma, Branicks, and KTM. This trend, driven by rising stress in German corporate lending, is expected to grow further in 2025. Schuldscheine restructuring, which involves renegotiating loan amounts, repayment schedules, or interest rates, has become a key strategy for distressed companies. Faced with financial instability and declining demand, borrowers, lenders, and investors are increasingly collaborating to avoid defaults.
The sale prices for NPL portfolios are expected to trend downwards, as banks face regulatory pressure to offload NPL stocks and as risk premiums rise due to economic uncertainty. Regulatory clarity on the EU Credit Servicer Directive and the new Credit Secondary Market Act (KrZwMG) is expected to enable postponed portfolio sales from 2024 to proceed, boosting transaction volumes. Clarity could help attract institutional investors to Germany’s distressed debt market, supporting increased secondary transaction volumes.
Conclusion
Germany’s NPL market in 2025 will remain challenging, driven by persistent distress in the CRE sector, rising SME loan defaults, and broader economic fragility. However, regulatory stabilisation and deferred portfolio sales present opportunities for strategic investors to acquire distressed assets at attractive valuations. Stakeholders should prepare for an evolving market shaped by regulatory changes, economic headwinds, and sector-specific pressures.
2025 could offer compelling investment opportunities in Germany’s distressed debt landscape for investors willing to look past near-term uncertainties.
Read the orginal article: https://www.debitos.com/news/german-npl-outlook-2025-rising-debt-sales-amid-weakening-economy/
