Germany's Economic Forecast Glows Brighter for 2025
Anticipated Upswing in German Economy Projected for 2025
Feeling a surge of optimism, the Kiel Institute for the World Economy (IfW) has revised its economic projection for Germany. A bumpy start to the year has given way to a much-needed boost, with the institute predicting a 0.3% growth by the end of 2022, marking the first growth after two consecutive years of decline. This rosy outlook was previously projected to be just a 0.0% growth back in the spring. "It seems like the German economy has found the beam in the tunnel," the researchers observed.
Looking ahead to 2026, the institute anticipates growth to surge to a healthy 1.6%, up from the previously estimated 1.5%. At first glance, economic activity might seem sluggish, but the institute believes this situation will improve, especially as the more flexible fiscal policy of the new government comes into play.
The resurgence of the economy is a complex interplay of factors. US trade policy continues to cast shadows, with its negative impact holding back economic momentum. The early export deliveries to the United States, which contributed positively to the strong start of the year, might actually weigh down production in the interim.
Fortunately, there are beams of light on the horizon. German exporters are preparing to bounce back from the continued challenge posed by decreased competitiveness. Inflation is projected to wane, with consumer prices expected to rise by an average of 2.2% in 2022, and only 1.6% in 2026, mostly due to lower energy costs. With improved household incomes, private consumption is due for a significant increase this year and in the following year, as families see their purchasing power grow due to reduced energy prices.
Businesses are also predicted to reinstate their investments, with investments gradually increasing, thanks to more favorable financing conditions and the stimulus from the government's expansionary fiscal policy. The federal government aims to invest billions in national infrastructure and defense projects, while also encouraging investment through hefty deductions.
The job market is expected to exit its slump next year, with unemployment rates showing a downward trend as the economy recovers. The unemployed rate is estimated to dip from the predicted 6.3% in 2022 to 6.1% in 2026, while the employed population is projected to rise from 46.055 million to 46.195 million. Initially, the government's budgetary deficit is expected to decrease to 2.1% of GDP in 2022, according to IfW estimates. The deficit is predicted to increase to 3.5% in 2026.
Amidst these predictions, the Kiel Institute for the World Economy has identified several key components driving Germany's economic growth forecast:
- The expansionary fiscal policy of the new German government is expected to inject a significant impetus to GDP growth, raising it by an estimated 0.8 percentage points in 2026.
- The rebound in investment, after years of decline, is anticipated to be a significant factor in the economic recovery.
- A rise in private consumption is expected due to increased household incomes.
- The rejuvenated labor market is forecasted to contribute to the overall economic growth.
- The positive business sentiment—made up of businesses feeling optimistic about future prospects—will enhance investment and consumption decisions.
[4] Source: ntv.de, rts
- The expansionary fiscal policies of the new German government, including the investment in national infrastructure and defense projects and the hefty deductions for businesses, are expected to improve financing conditions and stimulate employment, as stated in the community policy.
- In line with the employment policy, the forecast for Germany's economic growth in 2026 expects a surge in business investments, largely due to increased consumer spending and rising household incomes, which are projected to result from reduced energy costs and the rebound of the job market. The decrease in unemployment rates will lead to an increase in the employed population, contributing to the overall economic growth and the improvement of the business environment.
