Shining Hope for the German Economy: Bright Prospects Ahead for 2025 and Beyond
Anticipated Uptick in German Economy for 2025
Shedding the gloom of the past, the beacon of hope shines for Germany's economy, as indicated by the latest outlook from the Kiel Institute for the World Economy (IfW). The Institute has upgraded its economic forecast for Germany, projecting a 0.3% growth for this year – a substantial contrast to the previously predicted 0.0% growth in the spring forecast. This growth marks the first uptick following two successive years of decline.
The German economy, as the researchers suggest, is 'buzzing with light at the end of the tunnel.' In the approaching year, Europe's largest economy is expected to expand by a robust 1.6%, an improvement over the previously anticipated 1.5%.
However, economic momentum is predicted to begin on a sluggish note, in part due to the adverse effects of U.S. trade policy. As the IfW points out, not only are higher US tariffs dampening economic growth, but the initial surge in exports to the United States – boosting the strong start to the year – will soon impose burdens on production.
In the following year, as the increased fiscal maneuverability of the new federal government becomes more apparent, the expansion pace is expected to quicken significantly.
Apart from trade policy uncertainties, the persistently reduced competitiveness poses a challenge for German exporters. Inflation rates are expected to subside, with consumer prices projected to climb by an average of 2.2% this year and 1.6% in 2026, primarily due to reduced energy prices. With rising incomes and lower energy expenses, private consumption is predicted to increase substantially in both this and the next year, as the buying power of households substantially enhances.
Capital investments are also expected to gradually rebound, partly thanks to more favorable financing conditions and an expansionary fiscal policy in the coming year. The federal government plans to allocate billions for infrastructure development and defense expenditure. Additionally, investments are expected to be encouraged through super deductions.
The economic recovery is set to overcome the sluggish phase in the labor market in the following year, leading to a reduction in unemployment. The unemployment rate is projected to drop from the expected 6.3% this year to 6.1%, and the workforce is expected to expand from 46.055 million to 46.195 million in 2026. The state's financing deficit is expected to decrease to 2.1% of GDP in 2025, according to IfW estimates. However, it is forecasted to surge to 3.5% in 2026.
[1] OECD[2] IFO Institute[3] Bundesbank[4] European Commission
In consideration of the reinforced economic growth projected for Germany, it's crucial for the new government to reevaluate the community policy and employment policy to ensure alignment with the expanded economy. To sustain this growth trajectory, it's essential to provide favorable financing for businesses, particularly those engaged in capital investments.
