German Economy in Spring 2025: Fiscal policy turns up the heat

Jens Boysen-Hogrefe, Dominik Groll, Timo Hoffmann, Nils Jannsen, Stefan Kooths, Johanna Krohn, Jan Reents and Christian Schröder

No 122, Kiel Institute Economic Outlook from Kiel Institute for the World Economy (IfW Kiel)

Abstract: Economic momentum will remain weak for the time being. There are few signs of a significant economic upswing. In any case, the German economy suffers mainly from structural problems that are unlikely to abate in the short term. If the US administration raises tariffs on German imports, as assumed in this forecast, this will further dampen GDP. The uncertainty caused by erratic US trade policy alone is likely to have a negative impact. At the same time, the German export industry has already become noticeably less competitive and has lost market share in recent years. Our forecast for next year assumes that some of the plans agreed in the initial negotiations between the political parties CDU and SPD will be implemented and that fiscal policy will be much more expansionary. Against this background, we have revised our forecast upwards and expect GDP to grow by 1.5 percent in 2026 (December forecast: 0.9 percent). In the current year, GDP will stagnate (December forecast: 0.0 percent). Investment is expected to bottom out after four consecutive years of decline and start growing again in 2026. The reasons behind this are a less restrictive monetary policy, an improving economic environment, and an increase in public investment. Employment is expected to pick up again next year after falling this year. However, demographic change will increasingly limit the scope for higher employment. The budget deficit is expected to rise to 3.4 percent of GDP in 2026, after falling to 2.4 percent this year (2024: 2.8 percent). The debt-to-GDP ratio is projected to increase from 63.3 percent in 2024 to 65.4 percent in 2026. The impact of a more expansionary fiscal policy on debt levels will only become increasingly apparent in the years thereafter.

JEL-codes: E32 F01 H68 (search for similar items in EconPapers)
Date: 2025
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