Economic Outlook: Leading German Economic Institutes Forecast Pessimism for 2025
According to various economic research institutes, the German economy is not expected to recover from its current stagnation in the coming year. The Kiel Institute for the World Economy (IfW) predicts only a stagnation for 2025, while the Leibniz Institute for Economic Research in Essen (RWI) anticipates a slight contraction of 0.2 percent.
Meanwhile, the German Institute for Economic Research (DIW) forecasts a modest growth of 0.2 percent. The IfW has indicated that the German economy remains mired in stagnation, with DIW researchers commenting that the economy is dragging through this period, and a sustainable recovery appears increasingly distant due to ongoing structural challenges.
DIW's economic expert, Geraldine Dany-Knedlik, noted that the country is facing a critical combination of cyclical stagnation and structural issues. The manufacturing sector, traditionally a stronghold of exports, is particularly struggling. This includes industries such as chemicals, electrical engineering, and machinery and vehicle manufacturing, which are experiencing low capacity utilization. Furthermore, anticipated protectionist trade measures from the incoming U.S. president are expected to negatively impact corporate revenues. The IfW has pointed out that companies have already struggled to keep pace with global trade due to declining competitiveness.
For the current year, both the IfW and the RWI forecast an economic decline of 0.2 percent, following a contraction of 0.3 percent in 2023. This downturn is increasingly affecting the labor market, with 38 percent of over 2,000 surveyed companies indicating plans to reduce their workforce next year, and this figure rises to 44 percent within the industrial sector. In contrast, only 17 percent intend to hire additional staff. This outlook marks the most pessimistic perspective since the global financial crisis of 2008. The previously resilient services sector is also showing signs of weakness.
On a more optimistic note, the Munich-based Ifo Institute believes that a recovery is possible if the new government implements appropriate economic policies. They suggest that economic growth of 1.1 percent could be achievable next year, but this would drop to 0.4 percent without the right measures in place. Timo Wollmershäuser, head of Ifo's economic research, mentioned that it remains uncertain whether the current stagnation represents a temporary weakness or a more enduring and painful transformation of the economy.
Looking ahead, the DIW does not expect a significant economic upswing until 2026, predicting only incremental growth of approximately 1.2 percent at that time. Other institutes have echoed this sentiment, albeit with slightly more conservative estimates, projecting growth just below one percent. In contrast, the RWI stands out with a more optimistic forecast of 1.3 percent growth for 2026.
Overall, the outlook for the German economy remains challenging, with significant implications for employment and industrial output as businesses navigate through a period of uncertainty.
