Projected 2025 Economic Outlook for Germany: Sluggish Growth, minimal expansion; potential rebound in 2026 only.
The Cologne-based Institut der deutschen Wirtschaft (IW) has released its Autumn Prognosis for 2025, painting a picture of a German economy that is expected to stagnate next year. The forecast predicts a growth rate of only about one percent for the German economy compared to the previous year.
Despite the anticipated growth, the real gross domestic product and the number of employed persons will remain at the previous year's level in 2025, according to the IW forecast. This stability in employment is somewhat surprising, with around 46 million employed persons expected in 2025, the same as in the previous year.
However, the employment situation is not uniform across sectors. The manufacturing sector and temporary work appear to be deteriorating, with job losses observed in the first half of 2025, resulting in a loss of 96,000 socially insured jobs. In contrast, the public and social services sectors saw an increase of 103,000 jobs in the same period.
The registered unemployment rate is predicted to rise to an average of 2.955 million people in 2025, corresponding to an unemployment rate of 6.3 percent. This is an increase from the previous year.
The German foreign trade remains in disarray due to geopolitical normalization and confrontational US trade policy, adding to the uncertainties faced by investors. As a result, investments remain in "caution mode" due to these multiple uncertainties.
Consumption remains below its potential due to dampened employment prospects in Germany. The initial impact of these unemployment benefit reforms is expected to only slightly reduce unemployment.
Looking ahead to 2026, the IW expects an improvement in the German economy, but with just over one percent growth, there will be no real upswing. Reforms to unemployment benefits are expected to have their first positive effects on the labor market no earlier than 2026. However, the forecast does not indicate any predictions for the unemployment rate in 2026.
In conclusion, the IW's forecast for 2025 and 2026 paints a picture of a German economy that is expected to stagnate in 2025, with a slight improvement in 2026. The employment situation is expected to remain challenging, particularly in the manufacturing sector and temporary work, while the public and social services sectors may continue to see growth. The uncertainties in foreign trade and investments, along with the impact of unemployment benefit reforms, will likely continue to influence the economy in the coming years.
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