 German Economy Poised for Upturn Thanks To Fiscal Package; Uncertainties in the Global EconomyGeraldine Dany-Knedlik, Guido Baldi, Nina Maria Brehl, Hella Engerer, Angelina Hackmann, Konstantin A. Kholodilin, Frederik Kurcz, Laura Pagenhardt, Jan-Christopher Scherer, Teresa Schildmann, Hannah Magdalena Seidl, Ruben Staffa, Kristin Trautmann and Jana Wittich DIW Weekly Report, 2025, vol. 15, issue 36, 213-231 Abstract: The German economy is slowly emerging from its trough. After a bumpy start to the year, which was marked by tariff-related special effects, growth in 2025 remains subdued at 0.2 percent. However, the economy is gradually picking up speed from the current third quarter onwards. Over the next two years, this will translate into noticeable economic growth of 1.7 and 1.8 percent annually, respectively. The main drivers are the extensive fiscal package for infrastructure and climate protection, higher defense spending and tax incentives for corporate investment. These are primarily stimulating government consumption and investment, even if—as assumed in this forecast—the funds are disbursed at a slower rate than estimated in the federal government budget draft. However, as production capacities are currently underutilized, there is at least a chance that planned projects will be implemented quickly. Nevertheless, the expansionary fiscal policy only masks the structural weaknesses of the German economy. Industry is in crisis: High production costs, dwindling competitiveness, and demographic trends are slowing momentum. Traditionally strong foreign trade is losing importance, as growth is mainly supported by the domestic economy. Private consumption continues to grow, albeit at a subdued pace. While the persistently high level of unemployment and the associated job loss concerns have a dampening effect this year, a more favorable situation on the labor market should restore confidence from 2026 onwards. Rising real wages and lower inflation will also support consumption. Consumer price inflation is expected to be 2.1 percent in 2025. In 2026, it is likely to be in line with the European Central Bank’s target of 2.0 percent before rising slightly to 2.2 percent in 2027 as a result of expansionary fiscal policy. After exports to the United States were brought forward at the beginning of the year due to fears of tariffs threatened by US President Trump, a slump followed when the new trade barriers came into force. Although the provisional agreement between the EU and the US has stabilized the situation somewhat and reduced uncertainty, the ongoing trade barriers and the comparatively strong euro will continue to weigh on German exports. Robust demand from European partner countries provides some relief. The international environment is still characterized by considerable uncertainty. The US government’s tariff policy is weakening global trade and increasingly affecting the United States itself. In China, the real estate crisis and structural problems are weighing on growth. Emerging markets remain the engine of the global economy, while advanced economies are faltering. Overall, the global economy is expected to grow by 3.7 percent in 2025, 3.3 percent in 2026, and 3.5 percent in 2027. Keywords: Business cycle forecast; economic outlook (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:diw:diwdwr:dwr15-36-1 Access Statistics for this article DIW Weekly Report is currently edited by Tomaso Duso, Marcel Fratzscher, Peter Haan, Claudia Kemfert, Alexander Kritikos, Alexander Kriwoluzky, Stefan Liebig, Lukas Menkhoff, Karsten Neuhoff, Carsten Schröder, Katharina Wrohlich and Sabine Fiedler More articles in DIW Weekly Report from DIW Berlin, German Institute for Economic Research Contact information at EDIRC. |
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