Economic experts pessimistic about German growth in near future

The German economy is going to need longer than anticipated to get back on track, according to a leading economic institute, which sharply downgraded its growth forecasts for the next two years on Thursday.

Researchers at the Munich-based ifo Institute expect the economy to grow by 0.8% in 2026 and 1.1% in 2027, down by 0.5 percentage points each compared to the last projection in September, a forecast largely echoed by other economic institutes.

Ifo researchers also revised their forecast for the current year, expecting gross domestic product (GDP) to grow by merely 0.1%, down from 0.2%.

Germany's export-driven economy has been hit hard by US tariffs imposed by the Trump administration while trying to recover from two consecutive years of recession in 2023 and 2024.

Global trade headwinds and competition from China are all weighing on the country's industrial base, while consumers are grappling with rising prices.

"The German economy is adapting only slowly and at great expense to the structural shift through innovation and new business models," said Timo Wollmershäuser, head of forecasts at ifo.

"In addition, companies and start-ups in particular are hindered by bureaucratic hurdles and an outdated infrastructure."

The conservative-led government of Chancellor Friedrich Merz is planning to invest billions in the coming years to update the country's crumbling infrastructure as well as in defence, but ifo experts and other institutes believe structural reforms are needed to achieve a long-term economic revival.

Researchers have been pushing for measures to bring down energy costs and social spending as well as slashing red tape.

While forecasts by other economic institutes, including the Kiel Institute for the World Economy (IfW) and the RWI-Leibniz Institute for Economic Research, are in line with the ifo projections, the German government's own economic forecast is more optimistic, projecting GDP to grow by 1.3% and 1.4% in 2026 and 2027, respectively.

The Halle Institute for Economic Research also expects a slight upswing.

"The many structural problems in the welfare system, excessive bureaucracy and the lag in artificial intelligence and other modern technologies are causing Germany's economy to tread water,"said IfW President Moritz Schularick.

Challenges are manifold

Tariffs imposed by US President Donald Trump on EU imports after he took office in January are expected to dampen German economic growth by 0.3 percentage points in 2025 and by 0.6 percentage points in 2026, according to ifo.

"The uncertainty caused by the tariffs remains high, even though the acute conflicts between the US and the EU have been defused," Wollmershäuser noted.

Even though the trade agreement between Washington and the bloc reached earlier this year managed to prevent a full-blown trade war, EU businesses are still faced with higher tariffs than under the previous administration of president Joe Biden.

A baseline levy of 15% applies on most goods, plus higher tariffs on steel and aluminium, for example.

While the global economy is expected to grow by an average of 2.5% per year between 2025 and 2027, German industry will not benefit from this trend and will continue to lose competitiveness, according to ifo.

Measures planned by the government to boost growth are expected to help in the short term, but are not sufficient to expand the economy's production capacity in the long term, it said.

Researchers expect a growth effect of 0.3 percentage points in 2026 and 0.7 percentage points in 2027.

"The German economy is losing momentum because the workforce potential, corporate investment, and productivity growth are declining," Wollmershäuser said.

"Without structural reforms, there is a risk of further erosion of the business location. Measures are needed that strengthen the supply of labour through additional incentives to increase working hours or participation in the labour market, and boost productivity through comprehensive digitalization, and simplification of the state system."