Economic Outlook for 2025 Revised Downward: 40% of Companies Anticipate Job Reductions

The current assessment of the German labor market paints a grim picture, with forecasts indicating a downturn not seen since the global financial crisis of 2009. A recent survey conducted by the Institute of the German Economy (IW) reveals that a significant portion of companies, specifically 40%, are planning to reduce their workforce in the upcoming year, while only 17% express intentions to hire new employees.

This survey, which involved over 2,000 companies in November, highlights the deteriorating employment outlook. According to Michael Grömling, a leading economist at IW, the employment prospects mirror the bleak conditions faced during the financial crisis, with 2024 expected to be a challenging year for the German economy.

Particularly concerning are the prospects within the industrial sector, where merely 14% of firms intend to add to their workforce, contrasted with 44% that are gearing up for layoffs. The underlying causes for these job cuts are attributed to the ongoing economic crisis and the adverse business conditions impacting numerous firms. A mere 16% of respondents indicated an improvement in their economic situation compared to the previous year, while half reported a decline.

Looking ahead, the sentiment among businesses remains pessimistic, as reflected in their strategic planning. Approximately 25% of companies anticipate increasing their investments in 2025 compared to this year, while 40% expect to reduce their investment levels. Such cautiousness underscores the broader economic challenges faced by the nation.

The Kiel Institute for the World Economy corroborates this trend, having recently downgraded its forecasts for the German economy. It projects that the gross domestic product (GDP) will contract by 0.2% this year and remain stagnant in the following year. The institute warns that the repercussions of the recession are now reaching the labor market, with unemployment rates expected to rise to 6.3%, up from the current 6.0%.

Among the various factors influencing this downward revision are anticipated tariffs from the United States and the intensifying crisis within the German industrial sector. Analysts note that the German economy is grappling with significant structural weaknesses that hinder recovery efforts. The current capacity utilization in industries is reportedly 5 percentage points below the levels typically seen during standard recession periods.

However, there is a glimmer of hope that the upcoming early elections could reduce the period of economic uncertainty significantly. The researchers at the Kiel Institute suggest that a shift in government policy could lead to more favorable economic conditions.

In terms of consumer behavior, the Kiel Institute predicts only modest contributions from private consumption in stimulating economic activity. Furthermore, construction investments are expected to continue their downward trend in both 2024 and 2025. The inflation rate is anticipated to stabilize around 2.2% for both this year and next, which could further complicate the financial landscape.

Looking ahead to the 2025 and 2026 fiscal years, the Kiel Institute estimates that the national financial deficit will be about EUR5 billion and EUR20 billion higher than previously anticipated, contingent upon a reorientation of fiscal policy by a new government.