The Ifo Institute has revised its outlook for the German economy, projecting subdued growth over the next few years as the nation grapples with both external pressures and internal structural hurdles. According to the latest forecast, the German economy is expected to experience only a modest recovery, with growth rates adjusted downward for 2026 and 2027.

The research institute now anticipates Germany's gross domestic product (GDP) will expand by just 0.8% in 2026 and 1.1% in 2027, both figures marking a 0.5 percentage point decrease from previous estimates. For the current year, economic output is projected to stagnate, with a minimal increase of 0.1%.

Structural Weaknesses and External Pressures

This more cautious assessment is attributed to a combination of persistent challenges. The Ifo Institute highlights ongoing difficulties for German exporters stemming from tariff policies enforced by the United States, as well as domestic factors such as bureaucratic obstacles and outdated infrastructure. These issues are seen as slowing the adaptation of the German economy to structural change and innovation.

Compared to the federal government's more optimistic projections, the Ifo Institute's outlook is notably conservative. While the German government expects economic growth of 1.3% in 2026 and 1.4% in 2027, the Ifo Institute remains more reserved in its expectations, citing concerns about the pace and direction of recent policy reforms.

Impact of US Tariffs and Global Trade Dynamics

Trade tensions with the United States continue to weigh on Germany's export sector. The Ifo Institute notes that increased tariffs, particularly on automotive, steel, and aluminum products, have dampened growth prospects, with the impact expected to reduce annual economic growth by up to 0.6 percentage points in 2026. Although recent agreements between the EU and the US have averted further escalation, the heightened tariff levels continue to pose challenges for key German industries.

Comparisons With Other Economic Institutes

The Ifo Institute is not alone in its cautious perspective. Other research bodies, including the RWI Essen and the Kiel Institute for the World Economy, have also revised their forecasts downward, with expectations of only 1% growth in 2026. The Leibniz Institute for Economic Research in Halle anticipates slight improvement, but the consensus remains that Germany's economy is struggling to gain momentum.

Labor Market and Inflation Outlook

Despite these economic headwinds, the German labor market is expected to remain relatively stable. Unemployment is projected to rise slightly to 6.3% in 2025, with a gradual decrease to 5.9% by 2027. Inflation rates are forecast to remain moderate, with consumer prices increasing by around 2.2% in 2026 and 2.3% in 2027. Declining energy prices are expected to contribute to this stability.

Global Growth Bypassing Germany

While the world economy is forecast to grow by an average of 2.5% annually from 2025 to 2027, Germany is not expected to benefit fully from this global upswing. The country continues to face competitive disadvantages, and measures implemented by the government, such as increased spending on infrastructure and defense, are expected to produce only limited short-term effects. Structural reforms are seen as essential for fostering long-term growth capacity.

Call for Structural Reform

Economists emphasize that substantial reforms are needed to address the underlying issues hindering Germany's economic performance. Persistent problems, including high energy costs, social security burdens, excessive regulation, and slow adoption of digital technologies, are cited as factors restraining productivity and investment. Without targeted reforms to encourage workforce participation, boost investment, and modernize the state, experts warn of further erosion in the nation's economic competitiveness.

While government stimulus packages may provide temporary relief, analysts caution that these measures will have limited long-term impact in the absence of comprehensive structural changes. The consensus among leading economic institutes is that a renewed focus on modernization and innovation is critical to reversing the current trend and ensuring sustainable growth for Germany's economy.