The far-right party in Germany has won its first state election since World War II, dealing a fresh blow to the fragile coalition government.

• On Sunday, Germany's far-right AfD achieved victories in two state elections, surpassing the number of votes received by the coalition parties led by Chancellor Olaf Scholz.
• The AfD's victory in Thuringia was the first time the party won a state election and signified the first far-right win in a state election since World War II.
• At the same time, Germany's economy, the largest in Europe, is facing challenges.

The far-right AfD won the state election in Berlin over the weekend, and political commentators predict that the ruling coalition will face challenges until a nationwide vote next year.

The AfD, a populist and anti-immigration party, achieved victories in two state elections on Sunday, surpassing the national ruling coalition's parties, including Chancellor Scholz's party.

The Scholz coalition will face challenges between now and the 2025 general election, according to Marcel Fratzscher, president of The German Institute of Economic Research, who made the statement on CNBC's "Street Signs Europe" on Monday.

The implementation of major reforms by the national government will be challenging, according to him.

The weak election results are likely to put "further strains" onto the already fragile coalition, according to Deutsche Bank economists in a note published Monday. They added that the results would likely accelerate the switch into campaign mode for next year's federal election, reducing the scope for meaningful reforms until then.

Results

In the eastern German states of Thuringia and Saxony, preliminary results indicate that the far-right AfD obtained more than 30% of the votes in both regions, with Thuringia seeing the AfD as the largest party with 32.8%.

Since the 2019 state elections, the far-right AfD has seen an increase in votes, winning around 28% in Saxony and 23% in Thuringia. Notably, the AfD's victory in Thuringia was the first time the party had won a state election and represented the first far-right win in a state election since World War II.

Although the AfD has achieved success, it is unlikely to join the ruling coalitions in Saxony and Thuringia as most other parties have stated that they do not wish to collaborate with the far right.

The election outcome coincides with Germany's economy, which is the largest in Europe, facing challenges. According to data released by Destatis last week, Germany's GDP fell by 0.1% in the second quarter of 2024 compared to the previous quarter. Additionally, figures published Monday revealed that Germany's manufacturing PMI fell further into contraction territory in August, reaching a multi-month low of 42.4.

In Saxony and Thuringia, Scholz's center-left SPD (the social democrats) received only 7.3% and 6.1% of votes, respectively, while other national government coalition partners, the Greens and the FDP (free democrats), also performed poorly.

The BSW (Sahra Wagenknecht Alliance), a left-nationalist party established in 2024, also achieved success on Sunday with 11.8% of the vote in Saxony and 15.8% in Thuringia.

On Monday, Carsten Nickel, Teneo's deputy Director of Research, stated that voters expressed their frustration with the ongoing feuds within the Berlin coalition, as well as disagreements over migration and the challenges posed by the Russian invasion of Ukraine.

Election outlook

Despite the upcoming national election, policymaking could remain challenging for the federal government due to the ongoing conflict and frustration in Germany's political climate, particularly the increasing anti-immigration sentiment.

Fratzscher stated that it is difficult to form governments, including at the federal level, due to the complexity of the process.

The political stalemate is a significant concern for an economy that requires reform, deregulation, a significant push on investment, and increased engagement in Europe.

The upcoming national election in Germany in 2025, scheduled for September, will be preceded by state election results. However, experts predict that this new state election outcome is unlikely to trigger a snap nationwide vote.

Deutsche Bank stated that the results are not sufficient to prematurely end the government coalition in Berlin.

Rare are snap elections in Germany due to constitutional obstacles that make it difficult to call them.

The focus is shifting to two upcoming state elections, including one in Brandenburg, which will take place before the national vote. Scholz's SPD is a part of the ruling coalition in the state and aims to maintain its vote share.

Nickel stated on "Squawk Box Europe" that Scholz and the SPD are currently hoping for a peaceful period before concentrating on their campaign strategy in anticipation of the national election.

Next year, things will calm down, providing hope for the social democrats and Olaf Scholz, according to him.

"The plan is to wait for a year and then concentrate on the story, considering that Germany has been in significant geopolitical turmoil for the past three years, and we are not yet at the end of it. Would you be willing to replace the government in this situation or give us some time?"