Joint Economic Forecast for the German Economy #2-2025 – Expansionary Fiscal Policy Masks Weak Growth

Germany has been in recession for the past two years. The recently revised national accounts show that the crisis was much more pronounced than previously reported. With stagnation in the first half of this year, the German economy appears to have bottomed out. However, a broad-based recovery is not expected, as fundamental structural weaknesses persist. The economy is likely to experience expansionary impulses from fiscal policy over the next two years. While the service sectors, especially in the public sector, continue to grow strongly, the recovery in the manufacturing sector is likely to be modest. Above all, foreign demand for German goods is likely to remain sluggish, not least as a result of US tariff policy. Planned public spending on defence and infrastructure can only cushion this to a limited extent, as a significant portion of the funds will flow into sectors that are small in terms of the overall economy and where existing capacities are already well utilised. Overall, capacity expansions and corresponding private investments are likely to occur in the next two years. Gross domestic product is likely to stagnate this year, with an increase of just 0.2 percent. In the further forecast period, an expansionary fiscal policy is likely to boost the economy. Next year, gross domestic product will rise by 1.3 percent and in 2027 by 1.4 percent. This means that the institutes are leaving their forecasts for the current and coming year largely unchanged compared to the spring.