Investing.com - Germans are set to head to the polls later this month, in what has been described as one of the most consequential elections in the European powerhouse's recent history.
The vote comes at a precarious time for Germany's economy. Growth in the country is expected to contract for a third consecutive year in 2025, according to media reports citing the BDI industry association.
Despite expectations that the Eurozone currency area will expand by 1.1% this year and the global economy by 3.2%, Germany -- Europe's largest economy -- is seen shrinking by 0.1%, BDI said.
Should the 2025 contraction come to pass, it would be the first time since Germany was reunified that it has shrunk for three straight years.
"Growth in industry in particular has suffered a structural break," BDI President Peter Leibinger said, according to Reuters.
A jump in competition from international rivals, elevated energy costs, high interest rates and broad economic uncertainty have dented activity in Germany, Europe's largest economy.
However, Leibinger argued that the crisis has largely been made in Germany, with governments unable to address structural weakness in the national economy.
Worries over the state of Germany's economy -- and a spat over how to revive growth -- contributed to the fall of the country's governing coalition overseen by Social Democratic Chancellor Olaf Scholz. Following a vote of no confidence in Scholz in December that led to the dissolution of Germany's national parliament, the Bundestag, the country will hold a snap national election on February 23.
Germany's conservative opposition Christian Democratic Union (CDU) party is on track to win the vote by a sizeable margin, polls have indicated, with Friedrich Merz tipped to become the next chancellor of Germany.
In a note to clients, analysts at UBS said one key election outcome centers around the number of parties entering the Bundestag.
Polls suggest that several parties, including the CDU, the far-right Alternative for Germany, and Scholz's Social Democrtic Party, are close to securing at least 5% of the vote -- an important threshold parties must pass in order to be represented in the Bundestag.
Although this could lead to a range of party coalitions, "concentrated" control of the Bundestag in one party could be more supportive of the growth outlook for Germany because the absense of a blocking minority party "opens up the space for some fiscal easing," the analysts argued.
With no blocking minority, "there would be room to increase spending or lower taxes" if a so-called "debt brake" is reformed, they said. This law, which was one source of the strife that led to the collapse of Scholz's government, stipulates that the state can only spend as much money as it brings in.
"However, the magnitude of any fiscal impulse is difficult to anticipate, as it depends both on what is technically feasible and what can be politically agreed," the analysts noted.