Financial establishments concur on an ongoing economic downturn.
The economists' consensus points towards a subdued closing for Germany's economy this year, as per their recent projections. Economic analysts concur with this prediction. The Kiel Institute for the World Economy (IfW) anticipates a stationary economy in 2025, while the Berlin DIW forecasts a mere 0.2% growth. The Munich Ifo, on the other hand, believes a 1.1% rise in GDP is possible if the new administration adopts favorable economic policies. However, if the economy fails to address its underlying issues, the growth will only amount to 0.4%. "It's uncertain whether the current sluggish phase is a temporary setback or a permanent and thus painful transformation in the economy," stated Ifo's chief economist, Timo Wollmershäuser.
During the year that's drawing to a close, analysts from IfW and DIW predict a shrinkage of 0.2% in the economy, following a 0.3% decline in GDP in 2023. "The German economy is trapped in stagnation," summarized the pessimistic forecast from Kiel economists. DIW experts share similar skepticism: "The economy is wrestling with stagnation, and a lasting recovery is becoming increasingly elusive, due to structural challenges." It won't be until mid-next year that the economy starts showing signs of improvement "gradually." For 2026, DIW forecasts 1.2% growth, while IfW predicts a mere 0.9% expansion. In the best-case scenario, Ifo sees 1.6% growth possible, but in the standard scenario, it predicts only 0.8%.
DIW's chief economist, Geraldine Dany-Knedlik, remarked, "We see a critical blend of economic weakness and structural problems." This situation is particularly affecting the manufacturing sector, traditionally strong in exports, and often referred to as the backbone of Germany's economy. Economists and policy advisors agree that the United States' announced trade policy is likely to create headwinds. If the new US government, led by President Donald Trump, implements parts of its protectionist announcements, such as import tariffs, it will further hinder exports, explained the Kiel IfW. "Furthermore," they added, "these exports have been struggling to keep pace with global trade due to the eroding competitiveness of domestic companies in recent years."
A survey conducted by the Institute of the German Economy (IW) reveals that the economy is already negatively impacting the labor market. According to the survey, 38% of over 2,000 companies plan to reduce their workforce in the following year, while only 17% intend to hire more employees. "The job market outlook is as bleak as it was during the global financial crisis in 2009," explained the labor market-friendly Institute from Cologne. The situation is particularly grim in the industry: Here, only 14% plan to hire more employees, while 44% plan to downsize their workforce. "Pessimism is also prevalent among service providers." They had supported the labor market in recent years, but now, according to the survey, 35% of companies also plan to decrease their staff, while only 23% plan to hire new employees.
Geopolitical risks and the approaching election in Germany are generally generating uncertainty among businesses and consumers. "Due to the impasse following the coalition breakdown, companies are likely to hesitate on investments until the economic policy direction of the future federal government becomes clear," emphasized the DIW. The IfW also mentions a burden factor for the economy.
Despite the uncertain economic outlook, economic forecasts suggest a modest recovery in 2026, with DIW predicting a 1.2% growth and IfW anticipating a 0.9% expansion. However, these projections are contingent upon the ability of the economy to address its underlying issues and overcome external challenges, such as geopolitical risks and potential trade disruptions.
The recent economic forecasts exhibit a consensus of subdued growth, with both domestic and international analysts, such as DIW and IfW, predicting a sluggish recovery for Germany's economy. This is partially due to structural challenges in key sectors, like manufacturing, which has been experiencing declining competitiveness and weak exports.
