Key takeaways
- Germany’s recovery is stabilizing, but long-term growth pressures remain
- Credit conditions are improving, but risk dynamics are diverging across markets and sectors
- Public credit markets are more volatile while private credit is repricing more gradually
- Some mid-market firms continue to lag on growth and productivity and reinvestment, suggesting that operating weakness rather than leverage is a bigger driver of credit differentiation
FIGURE 1 German public credit risk reprices sharply while private credit adjusts more gradually
Average one-year probabilities of default (PD), monthly
Source: Moody’s EDF-X platform as of Jan 2026
Fiscal stabilization amid structural constraint
Germany’s macroeconomic trajectory is shifting from a prolonged period of stagnation towards a modest but gradually strengthening, policy supported recovery. Following two consecutive years of contraction from 2023 to 2024, growth remained weak in 2025 at 0.2%, with activity supported almost entirely by domestic demand.1 Over the 2019–2024 period, the economy was effectively stagnant, reflecting a combination of cyclical shocks and deeper structural adjustments.
Moody’s expects a gradual recovery to take hold from 2026, with real GDP growth forecast at 1.1% in 2026 and 1.9% in 2027 as shown in Figure 2.1 However, this recovery is not expected to reflect a return to Germany’s traditional export-led growth model. Instead, it is initially driven by fiscal expansion and domestic demand, with growth expected to broaden into private consumption and investment as confidence improves.
FIGURE 2 German real GDP growth shows gradual recovery after recent contraction
Source: Moody's economy.com1
Fiscal policy is now the primary near-term engine of growth
Germany’s recovery is being underwritten by a substantial shift in fiscal policy. The expansion of Germany’s fiscal envelope, including significant investment through the Climate and Transformation Fund and a structural increase in defense spending, represents a material departure from the country’s historically conservative fiscal stance.2, 3
This fiscal expansion is expected to provide a meaningful boost to economic activity. Moody’s estimates that increased infrastructure and defense spending could raise real GDP growth by close to 1 percentage point cumulatively over the medium term, with additional spillovers into private consumption and investment.1
The macro impact of this shift is already visible in the composition of growth. Public consumption and investment have been the primary stabilizing forces in recent years, offsetting weakness in industrial output and exports. This is reflected in fiscal metrics highlighted in Figure 3, with deficits remaining elevated and debt levels stabilizing at a higher plateau.
FIGURE 3 Fiscal expansion drives a moderate rise in German government debt
Source: IMF4
Structural headwinds continue to constrain Germany’s growth potential
Despite the expected cyclical recovery, Germany’s medium-term growth outlook remains structurally weak. Moody’s estimates trend growth at approximately 0.6% over the 2020–2029 period, significantly below the median for Aaa-rated sovereigns.5 Several structural factors underpin this subdued outlook.
First, demographic pressures are intensifying. A shrinking working age population is contributing to labor market tightness and will increasingly weigh on both potential output and fiscal sustainability. However, near-term labor market conditions remain broadly stable. While policy measures such as increased labor migration and gradual pension reforms provide partial mitigation, more fundamental adjustments remain politically challenging.
Second, Germany’s industrial base is undergoing structural transformation. The automotive sector, a cornerstone of the economy, faces disruption from the transition to electric vehicles, while energy intensive industries continue to adjust to structurally higher energy costs. Between 2019 and 2025, real industrial output declined by 4.7%, with more than 500,000 jobs lost in high-productivity industrial sectors, highlighting the scale of the adjustment underway.5
Third, geoeconomic fragmentation and rising global competition are eroding Germany’s competitiveness in global manufacturing and intermediate goods trade. Exports are expected to continue lagging global trade growth, reflecting both external factors such as US trade policy and internal factors including declining market share in key sectors, particularly relative to China.5 Intra-EU demand, however, provides partial support. As visible in Figure 4, potential growth remains structurally low, limiting the strength of the recovery even as cyclical conditions improve.
FIGURE 4 German economic growth remains constrained by low potential output
Source: Moody’s economy.com1, World Bank6, European Commission7
External and geopolitical risks remain skewed to the downside
Germany’s open and industrially concentrated economy leaves it particularly exposed to external shocks. Moody’s highlights several downside risks to the macro outlook.
Trade-related risks remain elevated, particularly given the importance of the United States as Germany’s largest export destination, accounting for 9.4% of total goods exports in 2025.5 At the same time, increasing competitive pressure from China and the potential for further restrictions on critical inputs introduce additional uncertainty.
Energy-related risks also remain material. Germany continues to rely heavily on imported energy, with net imports accounting for 67% of consumption in 2024, including 92% of natural gas and 97% of oil, leaving the economy exposed to renewed price volatility and supply disruption should geopolitical tensions escalate further, particularly in the Middle East.5
A shifting growth model with implications for credit quality dispersion
The macroeconomic picture that emerges is one of cyclical recovery underpinned by fiscal policy, set against a backdrop of structural constraint and external vulnerability.
Germany retains significant economic strengths, including its scale, diversification, and institutional capacity, which support resilience. However, the combination of low potential growth, industrial restructuring, and rising fiscal intervention suggests that economic performance will remain uneven across sectors.
These dynamics are reflected in corporate credit quality, using Moody’s forward-looking Probability of Default (PD) measures as a timely indicator of expected credit stress. Unlike realized default rates, PD measures capture expected changes in credit conditions over the coming year and therefore tend to reprice ahead of observed deterioration. As Germany navigates a fragile, fiscally-supported recovery, average corporate PDs repriced higher through the stagnation period before easing as forward-looking credit conditions stabilized. Figure 5 benchmarks Germany’s average corporate PD against that of Western Europe, highlighting relative resilience while still capturing exposure to the regional cycle.
FIGURE 5 German corporate forward-looking default risk tracks below Western Europe across the cycle
Source: Moody’s EDF-X platform as of Jan 2026
At the aggregate level, forward-looking corporate default risk has risen and eased in broadly similar cycles across Germany and Western Europe, but with Germany consistently pricing at a meaningfully lower level. The regional average peaked at close to 2.5% in mid-2023 and then declined steadily from 2024; Germany’s average PD moved in the same direction but remained within a tighter 1.0–1.5% range. From late 2024 into 2025, both series edged higher again, consistent with the subdued growth environment, restructuring in energy-intensive industries and competitive pressures facing the region.
More recently, Germany’s corporate credit risk shows tentative signs of improving. The persistence of the level gap to Western Europe suggests that Germany’s corporate sector has so far absorbed these pressures with greater resilience than regional peers, even as it remains exposed to the same regional cycle. This relative resilience is also visible in the pullbacks in 2023 and 2025, when Germany’s PD declined more sharply while the Western European aggregate was broadly stable, which could reflect differences in corporate composition and financial structure rather than a fundamentally different macro backdrop.
To understand what sits behind this aggregate resilience, we consider listed and private firms separately. Market sensitivity and funding structures can produce very different PD dynamics.
German public-company credit risk surges above regional average before sharply pulling back to convergence
Credit risk for German listed companies has been more volatile than the Western European average over the years shown in Figure 6. The two PDs moved broadly in line through the pandemic and early recovery, before Germany's rose sharply in 2023 as structural and cyclical pressures intensified. In the last year, it has fallen back towards benchmark levels, though the speed of the retreat warrants as much scrutiny as the spike itself. The volatility reflects the sensitivity of Moody’s PD measures to equity market repricing, particularly in listed firms where capital structure and investor sentiment adjust rapidly.
FIGURE 6 German public-company PD reprices sharply before converging back to the regional average
Source: Moody’s EDF-X platform as of Jan 2026
Prior to the pandemic, both series remained within the 1.8–2.1% range. The COVID-19 shock produced a sharp, synchronized spike through 2020, consistent with the broad-based repricing of corporate credit risk across markets. This was followed by subsequent retreat through 2021–2022, which saw both series converging towards the 1.5–2.0% range – a period of relative calm before Germany's exposure to energy costs, weakening demand, and industrial pressures began to weigh visibly on credit quality.
From 2023 onward, Germany's public-company PD began pulling away from the benchmark, accelerating sharply to a peak of 3.9% in 2025. Importantly, this repricing occurred ahead of realized credit deterioration, reflecting the forward-looking nature of market-implied PD measures. This likely reflects a combination of the effects of prolonged industrial contraction, the erosion of export competitiveness and higher input costs. Listed companies have greater market sensitivity and typically repriced these risks faster and more severely than private corporates.
From 2025 into 2026, both series have fallen back from their respective peaks, but it is Germany's PD that has fallen more rapidly, compressing the gap with the Western European average as the two series have converged at around 2.7%. This faster pace of retreat is consistent with improving market conditions and suggests that market-specific stress is beginning to ease. That said, credit risk remains higher than pre-pandemic levels.
German private companies carry materially lower credit risk than regional peers, maintaining a persistent spread throughout
In contrast to the volatility observed in listed company forward-looking default risk, Germany's private-company PD has followed a more measured trajectory, rising steadily from 2022 and peaking in 2023 before declining gradually through to 2026 (Figure 7). The regional benchmark followed the same broad arc. Germany has maintained a material and stable discount to the Western European average, with the gap holding at around 70 basis points. The parallel movement of the two series, combined with the persistence of the spread, suggests that German private-company credit quality is being shaped by regional forces as much as domestic ones, while consistently pricing as a lower risk than its peers.
FIGURE 7 German private-company forward-looking default risk tracks persistently below Western Europe
Source: Moody’s EDF-X platform as of March 2026
At the start of 2022, Germany's private-company PD stood at approximately 1.1%, sitting around 70 basis points below the Western European average of roughly 1.8%. Both series repriced steadily through 2022 and into mid-2023 (Germany peaking near 1.75% and Western Europe reaching approximately 2.4%) before beginning to retreat. The synchronized rise across both series through this period reflects the broad-based tightening of credit conditions across the region, as rising interest rates and slowing growth weighed on corporate creditworthiness. Notably, the spread between the two series remained broadly constant throughout the ascent.
From mid-2023 onward, both series declined gradually and in parallel. The pace of decline has been measured rather than sharp, in contrast to the more rapid reduction seen in German public-company PD over the same period. This partly reflects differences in model construction and market dynamics. Moody’s listed-firm PD measures incorporate equity market valuations and volatility and therefore respond more rapidly to changes in market expectations. By contrast, private-company PD measures reprice more gradually, reflecting both lower exposure to market sentiment and the slower transmission of changing fundamentals through financial reporting cycles. This steady improvement from 2024 aligns with the broader stabilization in Germany’s macroeconomic outlook.
The persistence of the spread between Germany and Western Europe is notable. It may reflect genuine differences in corporate composition. Germany's Mittelstand has historically been associated with more conservative financial policies and relationship-based financing that may structurally support lower default rates relative to other Western European private companies.
This section highlights improving expected aggregate credit conditions but also underscores that headline measures can mask meaningful differences beneath the surface. From a portfolio perspective, that matters because pockets of sector-specific stress can become material even as overall risk eases. The next section breaks down YoY PD changes across sectors to assess whether the improvement is broad-based or driven by a narrower set of industries.
Sectoral trends: Broad-based improvement amid a fragile recovery
Germany's average expected forward-looking default risk has improved over the past twelve months, with every sector recording a decline in YoY average PD. As illustrated in Figure 8, this improvement is broad-based, spanning all industry sectors. These trends reflect a wider economic turning point for Germany, which has emerged from a period of contraction into a modest, policy-supported recovery. Key tailwinds include a landmark fiscal stimulus package targeting infrastructure investment, a revival in manufacturing and construction activity, and strengthening household spending underpinned by real wage growth and a stable labor market. However, this recovery remains fragile. Muted global demand, long-term competitiveness, uncertainty in the pace and effectiveness of structural reforms, and demographic pressures present a persistent drag on the country's growth potential. On balance, the sectoral credit picture is encouraging, but the durability of these improvements will depend on how well Germany navigates these broader challenges in the months ahead.
FIGURE 8 All industry sectors have experienced improvements in average PD on a YoY basis
Source: Moody’s EDF-X platform as of March 2026
While improvements are broad-based at the sector level, this masks increasing dispersion within sectors, where a subset of firms continues to underperform.
Structural drift in the Mittelstand: underperformance without acute stress
Concerns around the resilience of Germany’s Mittelstand have become more prominent in recent years, as media coverage highlights succession challenges, ownership transition, and questions around long-term competitiveness.8, 9 These narratives are often framed in binary terms, oscillating between resilience and vulnerability. However, such framing risks overlooking more gradual, structural forms of deterioration that may be less visible in aggregate indicators but more relevant for credit differentiation.
To assess whether these concerns are reflected in observable firm-level dynamics, we utilize Moody’s Orbis database to analyze a sample of approximately 13,000 German private companies with revenues below €1 billion and fewer than 2,000 employees, focusing on four core dimensions: revenue growth, productivity, asset expansion, and credit risk. Given the absence of direct information on ownership structure or succession outcomes, the analysis does not seek to identify governance effects explicitly. Instead, it focuses on identifying firms exhibiting persistent underperformance across observable financial and operating metrics.
We construct a cohort based on relative positioning within the sample across multiple dimensions, including revenue growth, productivity and asset expansion. The cohort captures firms that consistently rank in the weaker part of the sample distribution across these metrics, reflecting sustained underperformance rather than one-off deterioration.
Against this framework, a clear pattern of divergence emerges. Figure 9 shows that firms in the identified cohort underperform the broader sample across all key metrics. Revenue growth is lower both over the medium term and in the most recent period, indicating that the effect is not solely cyclical. Productivity, measured as operating revenue per employee, has grown more slowly for this group, while improving more materially across the broader population. At the same time, expansion of the tangible asset base has been limited, pointing to weaker reinvestment in productive capacity.
FIGURE 9 Growth, productivity and asset expansion: cohort vs control
Source: Moody’s Orbis
Growth and performance metrics are assessed over both a medium-term (2019–2024) and a near-term (2023–2024) horizon. The 2019–2024 period provides a consistent pre- and post-pandemic baseline, capturing structural trends across firms while avoiding distortions from shorter-term volatility. The 2023–2024 comparison isolates more recent dynamics following the post-pandemic recovery, allowing for a clearer assessment of current momentum. 2024 is used as the latest common reporting year to maximize coverage and comparability across private companies.
This combination is important. Weak growth in isolation can reflect maturity or sector dynamics. Weak growth alongside weaker productivity gains and limited asset expansion is more indicative of structural constraint. The signal is not driven by a single metric, but by consistent underperformance across all three.
This underperformance is also reflected in forward-looking credit risk measures. Using a country- and industry-specific peer-relative ranking of one-year expected probability of default, firms in this cohort are systematically positioned further into the upper tail of the risk distribution (Figure 10). The median firm ranks materially higher than the broader sample, and the share of firms in the highest-risk quartile and decile is significantly elevated.
FIGURE 10 Higher concentration in the upper tail of the credit risk distribution
Source: Moody’s EDF-X
The distinction between average and tail outcomes is important. Median differences in PD are meaningful, but the distribution shift is more pronounced in the tail. A larger proportion of firms in this group sits at the higher end of the risk spectrum, suggesting that deterioration is concentrated. From a portfolio perspective, this implies that risk is increasingly driven by a subset of underperforming names, rather than a uniform shift across the broader Mittelstand.
At the same time, there is limited evidence of acute financial stress. The cohort does not exhibit systematically higher leverage, and balance sheet indicators do not point to immediate pressure. Median debt/EBITDA levels are only modestly higher at around 2.4x compared to 2.1x for the broader sample, and the distribution of highly leveraged firms is not materially skewed towards the cohort. This suggests that the observed credit differentiation is not driven by balance sheet stress. Instead, the pattern is consistent with a gradual erosion of credit quality, driven by weaker operating performance and reduced reinvestment.
The signal largely persists within sectors (Figure 11). While the magnitude varies, firms in the cohort tend to rank higher in forward-looking default risk than their peers across industry, trade and services. This suggests that the effect is not purely a function of sector composition or macro exposure, but reflects firm-level dynamics.
FIGURE 11 Underperforming Mittelstand firms exhibit higher peer-relative PD percentile rankings across sectors
Median one-year PD percentile ranking within country-sector peer groups (higher percentile = higher expected default risk)
Source: Moody’s Orbis, Moody’s EDF-X
Taken together, the findings point to increasing dispersion within Germany’s mid-sized corporate sector. The data does not support a narrative of widespread stress or imminent deterioration. Instead, it highlights a subset of firms that are gradually losing relative momentum, characterized by weaker growth, lower productivity gains and limited expansion of their asset base, alongside a modest but consistent increase in credit risk.
For credit investors and lenders, the implication is less about identifying immediate stress and more about recognizing the early stages of divergence. These firms are not yet distressed, but they are incrementally riskier and less dynamic than their peers. As such, they are more exposed to further downside in a low-growth environment, where the ability to sustain productivity and reinvestment becomes increasingly important. Where it emerges, the credit impact is likely to be gradual rather than abrupt, reinforcing a broader theme of structural dispersion in the German corporate landscape and the importance of early differentiation.
Private credit: dispersion increases the importance of underwriting discipline
The observed divergence within Germany’s mid-sized corporate sector has immediate implications for private credit markets. The firms identified in the cohort remain broadly accessible to credit markets, with no evidence of acute balance sheet stress and leverage levels that are comparable to the broader population. As such, this is not a story of constrained access to credit or a structural funding gap.
Instead, the findings point to increasing heterogeneity in credit quality within a segment that is often treated as relatively homogeneous. For private credit investors, this shifts the focus away from market access and towards underwriting discipline. The distinction between firms that are gradually losing momentum and those that continue to sustain productivity and reinvestment becomes more consequential in a low-growth environment.
This has several practical implications. First, traditional reliance on leverage-based metrics is likely to be less informative in differentiating risk within the segment. As the analysis shows, balance sheet indicators do not fully capture the emerging divergence in credit quality. Instead, greater emphasis is placed on operating performance, including revenue trajectory, productivity dynamics and reinvestment behavior.
Second, the gradual nature of the observed deterioration suggests that risk is more likely to crystallize through weaker medium-term performance rather than immediate credit events. This increases the importance of forward-looking credit assessment, including the ability to identify early-stage underperformance before it is reflected in headline financial metrics.
Finally, from a portfolio perspective, the increasing concentration of risk in a subset of underperforming firms implies that dispersion, rather than general directionality, is the dominant driver of outcomes. This reinforces the importance of granular monitoring and relative value assessment within portfolios, particularly in strategies with significant exposure to mid-market borrowers.
Summary
Germany’s macroeconomic trajectory is shifting from a prolonged period of stagnation to a modest, policy-supported recovery. Fiscal expansion is playing a central role in stabilizing growth, with increased public investment and defense spending providing near-term support. However, this recovery does not signal a return to the country’s traditional export-led model. Structural constraints, including demographic pressures, industrial transformation and weaker external demand, continue to limit medium-term growth potential.
At the aggregate level, corporate credit conditions have stabilized, with expected default risk rising through the recent downturn before easing as the macro environment improves. However, this headline stability masks important differences across markets and sectors. Public credit risk has been more volatile, reflecting rapid repricing through equity markets, while private company risk has adjusted more gradually, consistent with slower transmission of fundamental changes. Sector-level trends point to broad-based improvement, but these dynamics increasingly conceal variation within industries rather than across them.
This dispersion is most evident within Germany’s mid-market corporate segment. Analysis of approximately 13,000 private companies identifies a subset of firms exhibiting persistent underperformance across revenue growth, productivity and asset expansion. These firms are not characterized by elevated leverage or acute financial stress. Instead, they show signs of gradual erosion in operating performance and reinvestment capacity. This pattern is reflected in credit outcomes, with a higher concentration of firms in the upper tail of the forward-looking default risk distribution.
Taken together, the findings point to a shift in the nature of credit risk in Germany. Rather than broad-based deterioration, risk is becoming more concentrated in a subset of underperforming firms, while aggregate indicators remain relatively stable. For investors and lenders, this implies that credit outcomes will increasingly be driven by dispersion rather than direction. In this environment, the ability to identify early-stage underperformance and differentiate between firms on the basis of operating strength becomes more critical than reliance on traditional balance sheet metrics alone.
References
1Moody’s Analytics (2026) Germany: Economic outlook and key indicators (Précis). March 2026. Available to subscribers
2IMF (2024) Germany: Staff Concluding Statement of the Article IV Mission. Available at: https://www.imf.org/en/news/articles/2025/11/26/mcs-112625-germany-staff-concluding-statement-of-the-2025-article-iv-mission
3Deutsche Bundesbank (2024) Monthly Report, October 2024. Available at: https://publikationen.bundesbank.de/publikationen-en/reports-studies/monthly-reports/monthly-report-october-2024-938956
4International Monetary Fund (n.d.) World Economic Outlook database. Available at: https://data.imf.org/en/Data-Explorer?datasetUrn=IMF.RES:WEO(9.0.0)&INDICATOR=GGXWDG_NGDP
5Moody's Ratings (2026) Government of Germany – Aaa stable: Regular update. 17 March. Available to subscribers
6World Bank (n.d.) GDP growth (annual %) – Germany. Available at: https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?end=2024&locations=DE&start=2009&view=chart
7European Commission (n.d.) AMECO database: Potential output and related indicators. Available at: https://webgate.ec.europa.eu/ecfin/redisstat/databrowser/view/ameco_chapter06-05__custom_2040/default/table?lang=en
8Reuters (2025) Germany’s retiring Mittelstand owners struggle to find successors. 10 June. Available at: https://www.reuters.com/business/finance/germanys-retiring-mittelstand-owners-struggle-find-successors-2025-06-10/
9KfW Research (2024) KfW SME Panel 2024. Available at: https://www.kfw.de/About-KfW/Research/KfW-SME-Panel/
Contacts
Hanna Sundqvist
Head of Private Credit, Europe
Asset Management
+44 203 314 2217
Hanna.Sundqvist@moodys.com
Njeri Njenga
Financial Engineer
Asset Management Research
+44 203 314 2365
Njeri.Njenga@moodys.com
David Hamilton
Head of Asset Management Research
+1 212-553-5931
David.Hamilton@moodys.com
About
This article is a product of Moody’s Asset Management Research team, part of Moody’s Analytics (“Moody’s”), a division of Moody’s Corp. separate from Moody’s Ratings. The analysis and viewpoints expressed herein are solely those of Moody’s Asset Management Research team.
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