Germany’s growth estimates fall in recent ifo Institute report

BERLIN

Munich-based ifo Institute lowered its growth forecasts for the German economy for 2025 - 2026 and 2027 in a report published Thursday.

Germany’s growth estimate for this year was lowered from 0.2% to 0.1%, while ifo expects it to grow 0.8% and 1% in 2026 and 2027, respectively -- the estimates for 2026 and 2027 were lowered by 0.5 percentage points.

US tariffs continue to affect the German export sector. Estimates show that high tariffs will reduce growth by 0.3 percentage points this year and 0.6 percentage points next year, if they continue to affect the economy.

Germany’s annual inflation was 2.2% last year and 2.4% in November. Inflation is expected to average at 2.2% by the end of this year and remain at 2% in 2026, while rising to 2.3% in 2027.

Unemployment is projected to increase slightly this year from 2.7 million to 2.94 million, and to 2.95 million next year.

The report expects the unemployment rate to rise from 6% to 6.3% this year and remain at 6.3% in 2026, while estimating that the number of employed will fall from 45.98 million to 45.97 million.

Ifo estimates that the public sector’s budget deficit will fall from €118.8 billion ($139.2 billion) to €101.1 billion this year but rise to €151.8 billion next year.

Germany is expected to run a current account surplus of €209.7 billion this year, falling from €249.7 billion, while it is projected to drop to €199.2 billion next year.

German economy undergoes structural changes

The report said that the German economy is going through “a profound structural change that is shaped by decarbonization, digitalization, demographic changes, and geopolitical disruptions.”

The economy is trying to adapt via innovation and new business models, albeit more slowly than other countries.

“Germany is harder hit by structural change as the manufacturing sector, which is predominantly affected, is of great macroeconomic importance and demographic change is more pronounced,” it said.

Bureaucratic and infrastructural barriers hamper start-up activities, while structural changes are reflected in the slowdown of potential production growth in the coming years and the downward revision of potential production for the last few years. “This has significantly reduced the scope for recovery,” it added.

At the same time, US tariffs are affecting the global economy, and the new trade is shaped by policy regime in an uncertain environment -- the effects of the tariffs are expected to be felt in the coming months, slowing global economic growth, according to ifo.

The report expects the global economy to grow at an average of 2.5% annually from 2025 - 2027, while global trade will see strong growth this year due to the pull-forward effect of tariffs, but it will be followed by a slight decline on average next year.

The US is also expected to gradually feel the effects of high tariffs in some places, while the price effects are estimated to spread throughout value chains.

The report noted that the momentum in artificial intelligence (AI) is expected to continue for some time, while various geopolitical conflicts pose downside risks to growth estimates.

Ifo said uncertainties in estimates are due to the changes in global production and demand structure, especially due to China’s new role in the global economy, while US tariffs continue to be a risk.

German economy avoids technical recession in Q3

The German economy grew 0.3% in the first quarter, contracted 0.2% in the second, and avoided a technical recession in the third by growing to 0%.

High energy costs, weak global orders and high tariffs continue to be a problem for the economy.

China now produces most products it previously bought from Germany, while a chip shortage is causing slowdowns in the auto industry.

The government had promised to lift Germany out of economic stagnation with a sharp rise in infrastructure and defense spending, but the effect of those measures will take longer than expected to result in positive changes.

The government upwardly revised its growth forecast for 2025 from 0% to 0.2% on Oct. 8, while expecting a growth of 1.3% next year and 1.4% in 2027, led by public spending.