Ifo Institute Lowers Growth Forecast for Germany Amid Global Economic Challenges

The Ifo Institute has revised its economic growth forecast for Germany, projecting a modest growth rate of only 0.2% for 2025, a decrease from the previously estimated 0.4%. This adjustment highlights ongoing concerns regarding weak investment and the impact of protectionist measures implemented by the United States.

According to Ifo's analysis, the German economy is currently facing stagnation. Despite a slight improvement in consumer purchasing power, overall consumer sentiment remains cautious, and businesses are reluctant to invest. The industrial sector, in particular, is experiencing challenges due to sluggish demand and increasing international competitive pressures.

While the current forecast reflects a cautious outlook, it does not take into account potential political developments that may emerge from the new government. Ifo experts suggest that if recent proposals are effectively enacted, there could be substantial upward potential for growth. This could result in a higher-than-expected economic performance either later this year or in the following year.

Negotiations among the Union, SPD, and Greens have led to agreements on several constitutional amendments aimed at easing the debt brake to facilitate increased defense spending. Additionally, a proposed investment fund of EUR500 billion, financed through debt, seeks to bolster infrastructure and climate neutrality efforts.

In a previous forecast, Ifo outlined an alternative scenario where favorable political decisions could lead to a growth rate of 1.1% for 2025 and 1.6% for 2026. However, the current report warns of potential adverse effects from the erratic and protectionist economic policies of the new U.S. administration. The introduction of tariffs on imports from Mexico, Canada, and China, along with retaliatory tariffs, has already begun to exert negative pressure on both the U.S. and global economies. Should additional tariffs be imposed on European goods, the German export sector could be significantly impacted.

The Ifo Institute emphasizes the need for a stable political climate to foster trust and stimulate investment. The organization urges policymakers to navigate this period of uncertainty swiftly to restore confidence among businesses, particularly in light of the structural changes currently affecting the industrial sector.

Regarding labor market conditions, Ifo anticipates an unemployment rate of 6.2% for the current year, slightly worse than previous projections. For 2026, a rate of 6.0% is expected. Inflation is projected to be 2.3% this year, with a slight decline to 2.0% anticipated in the following year.