Spring Economic Outlook: Global Uncertainty Leads to Minimal Growth Forecast for Germany

Germany's economic prospects for the upcoming year are less optimistic than previously anticipated, with experts projecting a modest growth rate of only 0.1 percent. This forecast, part of the annual spring economic report, highlights a significant drop from September's estimate of 0.8 percent growth. The report does not account for potential negative impacts from tariff changes, indicating that the actual economic performance could be even weaker.

After suffering a contraction of 0.3 percent in 2023 and a further decline of 0.2 percent in 2024, any positive growth in 2025, albeit minimal, is seen as a slight improvement. Looking ahead to 2026, economists maintain a more optimistic view, forecasting growth of approximately 1.3 percent.

However, the report warns of significant risks stemming from U.S. trade policy, particularly under the current administration. The anticipated escalation of tariff measures could have detrimental effects on both the U.S. and European economies. Yet, the possibility of negotiations between the European Union and the United States could alleviate some of these tensions, potentially leading to a cessation of bilateral tariffs.

In a recent development, U.S. President Trump announced a temporary suspension of various tariffs for a period of 90 days, which has raised hopes for a de-escalation in trade disputes.

The spring forecast serves as a vital foundation for the German government's future financial planning, particularly regarding tax estimates and budget allocations. This analysis is conducted by several economic research institutes, including RWI in Essen, Ifo Institute in Munich, IfW in Kiel, IWH in Halle, and DIW in Berlin. Despite some positive indicators, such as proposed tax incentives, experts express concern that the current coalition government's plans may not adequately address the underlying challenges facing the German economy.

Critics argue that the coalition's focus on executing the coalition agreement might not suffice to reverse the economic downturn. While some initiatives, like proposed super-depreciation measures, reflect an understanding of the core issues, there is criticism over the lack of comprehensive solutions for social security systems and employment incentives.

Furthermore, expectations for increased defense spending and infrastructure investments in 2026 are tempered by the reality that these expenditures may primarily benefit smaller sectors that are already operating at capacity, potentially leading to price increases and supply shortages.

The German economy is also grappling with heightened international competition, especially from China. Structural issues such as a shortage of skilled labor, excessive bureaucratic hurdles, energy crises, and a declining workforce are compounding the challenges to economic growth. Consequently, rising unemployment is anticipated, with the jobless rate increasing from 5 percent to 6.3 percent since mid-2022.

As the economic landscape continues to evolve, experts predict that the unemployment rate will further rise in the coming months, with any potential improvement not expected until later in 2026. Inflation is projected to moderate slightly, but the period of interest rate cuts may soon conclude.

In conclusion, while Germany hopes for a slight economic recovery, significant uncertainties loom on the horizon, necessitating careful monitoring and strategic policy responses.