Germany’s AAA rating affirmed by Fitch with a stable outlook

Investing.com -- Fitch Ratings has confirmed Germany’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ’AAA’ with a Stable Outlook on February 28, 2025. The rating is supported by Germany’s high per capita income, a large and diversified economy, a strong institutional framework, high current account surpluses, and a positive net international investment position.

Germany’s ’AAA’ rating also benefits from its commitment to fiscal conservatism and its status as the benchmark issuer in the eurozone, which provides it with substantial financing flexibility and extremely low government financing costs. However, Germany’s growth prospects are hampered by several structural challenges.

The German economy, which contracted by 0.2% in real terms in 2024, is expected to grow modestly by 0.3% in 2025, due to uncertainties surrounding the federal election and potential US tariffs. Growth is projected to pick up to 1% in 2026 as some of these uncertainties reduce and the new government is likely to implement measures to support growth, including lower energy prices and increased investments.

Germany’s general government debt is expected to increase in the medium term to 65.8% of GDP in 2026, up from an estimated 63.8% of GDP in 2024, due to larger fiscal deficits and moderate nominal economic growth. Despite this increase, Germany’s debt ratio is still favorable compared to the eurozone average of 91.2% of GDP.

Germany’s external finances remain strong, with the current account surplus projected to average 5.7% of GDP in 2025-2026, significantly above the eurozone average of 3.2% of GDP. This surplus supports Germany’s net international investment position, providing a buffer against external shocks.

The recent German election has led to the possibility of a two-party government coalition between the Christian Democratic Union/Christian Social Union (centre-right) and the Social Democratic Party (centre-left). However, due to substantial policy disparities between the two parties, coalition negotiations are expected to be complex.

Germany continues to benefit from very low financing costs, a reflection of strong demand for its debt and its status as the benchmark issuer within the eurozone. This demand is supported by Germany’s robust credit fundamentals, prudent fiscal management, and a record of significant debt reduction.

Germany’s banking sector shows improving profitability and sound funding and liquidity, with strong capitalization and substantial regulatory buffers. However, Germany’s weak economic performance is expected to impact banks’ asset quality.

Germany has an ESG Relevance Score of ’5[+]’ for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption. These scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in Fitch’s proprietary Sovereign Rating Model (SRM). Germany has a high WBGI ranking at 87.6, reflecting its long record of stable and peaceful political transitions, strong institutional capacity, effective rule of law and a low level of corruption.

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