News of the week summary - 18/01/2026

Germany returns to growth

Germany’s economy grew by a modest 0.2 percent in 2025, marking its first annual expansion since 2022. While this signals the end of a multi-year recession, the recovery remains fragile and uneven. Growth last year was supported by higher consumer and government spending, including Chancellor Friedrich Merz’s debt-funded investments in infrastructure and defense, but was held back by weak private sector investment and falling exports, which declined for the third consecutive year.

The manufacturing sector, a key pillar of the German economy, also shrank for a third year in a row. Exports were particularly affected by higher U.S. tariffs, a stronger euro, and growing competition from China, with shipments to the United States dropping 7.8 percent, largely driven by a collapse in vehicle sales. Economists warn that despite the small rebound, 2025 was “another lost year” for Germany due to these structural challenges.

Looking ahead, the Bundesbank forecasts slightly stronger growth of 0.6 percent in 2026, though this is lower than earlier expectations. Analysts predict that Germany will gradually recover from its prolonged period of stagnation, but growth is expected to remain limited. Adjusted for inflation, industrial production has barely moved since 2019, reflecting the long-standing difficulties the economy faces.

On the fiscal side, Germany’s government deficit narrowed slightly to €107 billion, or 2.4 percent of GDP, down from 2.7 percent in 2024. However, the Bundesbank anticipates a significant increase in the deficit to 3.9 percent of GDP in 2026, reflecting continued government spending.

Global central bank officials rally behind Powell amid investigation

U.S. Federal Reserve Chair Jay Powell is facing an unprecedented criminal investigation over a $2.5 billion renovation of the Fed’s headquarters. The probe, launched by the Department of Justice, has been widely viewed as politically motivated, linked to pressure from President Donald Trump, who has repeatedly called for much lower interest rates and criticized Powell personally. Powell has refused to step down, emphasizing that central bank decisions are made in the public interest and must remain independent from political influence.

In response, leaders of 11 central banks, including the European Central Bank’s Christine Lagarde, the Bank of England’s Andrew Bailey, and the Bank of Canada’s Tiff Macklem, issued a statement expressing full support for Powell. They stressed that central bank independence is crucial for maintaining price stability, financial stability, and broader economic health. Fed officials have also warned that undermining this independence historically leads to negative economic consequences.

Former Fed chairs—including Janet Yellen, Ben Bernanke, and Alan Greenspan—joined a separate statement condemning the investigation, likening the situation to practices in emerging markets where political interference often destabilizes economies. Prominent former U.S. Treasury officials from both Republican and Democratic administrations echoed these concerns, arguing that Powell’s independence is essential for effective monetary policy.

The controversy comes as the Fed has recently cut interest rates to a three-year low of 3.5–3.75 percent, slower than Trump’s desired reductions. Some Republican lawmakers have also criticized the investigation, warning that attacks on the Fed could threaten its ability to function effectively. Powell has pledged to continue his work with integrity, noting that public service sometimes requires standing firm in the face of threats.

The political tension has already affected markets. Investors, seeking safety amid uncertainty, drove gold and silver to record highs, while the dollar fell slightly against major currencies. Analysts warn that a further clash between the White House and the Fed could increase market volatility and create risks for economic stability.

Intra-EU trade declines for the first time in nearly a decade

Trade between European Union member countries fell in 2024, marking the first drop outside the pandemic years since 2016. In relation to the EU’s overall economy, intra-EU trade fell from 23.5 percent of GDP in 2023 to 22 percent. The slowdown highlights challenges in the bloc’s single market, which is designed to allow goods, services, and capital to move freely across national borders.

Several structural issues are weighing on trade. The time to develop and approve EU-wide product standards has increased from just over three years to four, while fragmented national regulations make it complex and costly for businesses to operate across multiple countries. European companies are increasingly finding it more attractive to export outside the EU rather than trading within the bloc. Additionally, the EU’s share of global foreign investment has dropped 22 percent over the past five years.

Experts warn that this decline in competitiveness is largely self-inflicted. Overly complex rules and a perceived tension between competitiveness and sustainability have created hurdles for businesses. Energy price fluctuations, partly resulting from Russia’s war in Ukraine, may have also contributed to the decline in internal trade.

The European Commission is seeking to reverse this trend. A single-market strategy published last summer outlines plans to strengthen integration, with a roadmap toward full market integration expected by 2028. Past efforts have focused on areas such as mutual recognition of professional qualifications and adoption of digital technologies, but progress has been uneven, leaving some key barriers in place.

Wall Street banks post strongest year in four

Goldman Sachs and Morgan Stanley closed 2025 with exceptionally strong quarterly profits, highlighting a broader rebound in Wall Street’s investment banking sector. Goldman earned $4.6 billion, up 12% from the previous year, while Morgan Stanley reported $4.4 billion, an 18% increase. Shares in both banks reached record levels as investors reacted to these results.

The surge was fueled by a renewed appetite for corporate deals and robust stock markets. Investment banking fees, which come from advising companies on mergers, acquisitions, and capital raising, jumped significantly. Morgan Stanley saw a 45% increase in fees from deal-making, surpassing JPMorgan Chase in advisory revenues. Executives from both banks noted that loosening U.S. regulations and easing interest rates have encouraged companies to pursue major strategic moves they had previously delayed.

Equities trading also contributed strongly, with the five major U.S. banks collectively reporting record annual trading revenues of $60 billion. This reflects strong stock market performance and a shift by some investors away from the U.S., increasing trading activity. For Goldman, equity trading alone generated $4.3 billion in the quarter, surpassing Morgan Stanley’s $3.7 billion.

Both banks have also strengthened their asset and wealth management arms, which provide more stable revenues than investment banking and trading. Morgan Stanley’s client assets exceeded $9 trillion, moving it closer to a $10 trillion target, while Goldman aims to manage $750 billion in alternative assets by 2030. BlackRock, the world’s largest asset manager, also reported record inflows, bringing assets under management above $14 trillion.