Economic Recovery on the Horizon for Germany: Slight Growth Forecasted for 2025 and 2026
Forecasted end to economic crisis: Recovery anticipated by 2026 - Economic outlook indicates the economic crisis will terminate by 2026
Germany seems to be steering its way out of its longest economic crisis since 1949, with leading economic research institutes predicting a growth surge in the upcoming years.
Upcoming Year's Outlook
- Ifo Institute: After three years of stagnation, the Munich-based Ifo Institute expects an increase in the nation's GDP of 1.5 percent in the next year, nearly double its initial assumption of 0.8 percent.
- Institute for World Economics Kiel (IfW): The IfW predicts a growth rate of 1.6 percent for 2026.
- Essen Leibniz Institute for Economic Research (RWI): Also optimistic, the RWI anticipates a strong GDP growth of 1.5 percent.
- Leibniz Institute for Economic Research Halle (IWH): Although less enthusiastic, the IWH expects a 1.1 percent growth increase.
However, the long-term view remains dismal, according to the Ifo.
This Year's Development
"The crisis of the German economy has reached its lowest point in the winter half-year," said Ifo's chief economist Wollmershäuser. Despite expectations of a slightly better development for the current year than in the spring, growth will likely be scarce in 2022. The Ifo has raised its forecast for the year to 0.3 percent, while the IWH increased it from 0.1 to 0.4 percent.
Causes for Optimism
One reason for the improved predictions lies in the announced growth package of the new federal government. The Ifo Institute estimates the economic effect of the proposed spending increases, tax cuts, and investments this year at 10 billion euros, and 57 billion euros next year.
But for the Long Run....
The outlook for the second half of the decade remains "pretty bleak," according to Wollmershäuser. "We have to get used to the fact that we will grow on average with less than half a percent until the end of the decade." The Ifo Institute estimates the medium-term annual growth potential of the German economy at only 0.3-0.4 percent.
The reason? The "demographic turn," as Wollmershäuser complained. "2025 is the first year in which the potential labor force will decrease." "This shrinking labor supply can basically only be maintained through productivity gains, and they don't look very good at the moment."
The Organization for Economic Co-operation and Development (OECD) advises Germany to better integrate women and older people into the labor market—through better childcare options and fewer incentives to retire early. "The shortage of skilled workers threatens to become a major brake on economic growth," the OECD report states.
The Trump Card: Trade Policy
The improved economic forecasts for this and next year are to a significant extent based on the assumption that the trade conflict initiated by the U.S. government with the EU will end favorably. However, the European dispute with the United States remains unresolved.
In case of an escalation, a renewed recession looms, with IWH Vice-President Oliver Holtemoeller warning that the currently raised U.S. import tariffs would jeopardize German economic growth by 0.1 percentage points in 2022 and 0.3 percentage points in 2026. In the event of an agreement in the trade conflict, growth could be higher, but in the event of an escalation, disaster lurks.
Inflation and unemployment rates are projected to remain stable, according to the institutes.
[1] Source
[2] Source
- The announced growth package of the new federal government, which includes spending increases, tax cuts, and investments, is expected to have an economic impact of 10 billion euros this year and 57 billion euros next year, as per the Ifo Institute's estimates.
- The Organization for Economic Co-operation and Development (OECD) advises Germany to better integrate women and older people into the labor market to address the looming skilled worker shortage, which threatens to become a major brake on economic growth.
