German Economy Slowdown Forecast for Next Year

German Economy Slowdown Forecast for Next Year

The Leibniz Institute for Economic Research Halle (IWH) has released its autumn forecast, projecting global production to increase by 08 percent in 2026, following a 02 percent rise in 2025 Similar expansion rates are anticipated for Eastern Germany These figures represent a slight downward revision from the IWH’s June projections, which had forecast 11 percent growth for 2026 and 04 percent for the current year

Recent substantial increases in US tariffs are noted, though financial markets have largely absorbed the news, potentially due to the continued robustness of the global economy despite ongoing trade conflicts Monetary policy has generally loosened worldwide as inflationary pressures from 2021-2023 have subsided, though the US Federal Reserve has been more cautious Interest rate reductions are still expected in the US over the coming quarters, mirroring trends elsewhere Fiscal policy in advanced economies is currently considered broadly neutral

Overall, the world economy is expected to continue expanding at a moderate pace However, the increased US tariffs are anticipated to dampen global trade and production Slightly stronger growth rates are projected for the remainder of 2026, driven in part by investment in new technologies The forecast estimates global production will grow by 26 percent in 2025 and 24 percent the following year

The German economic picture has become somewhat cloudier following a revision of data by the Federal Statistical Office, which shows a decline in production from late 2022 to mid-2024 While production expanded during the winter months, Germany’s gross domestic product has recently contracted Exports to the US have decreased following the anticipated tariff increases and construction investment has seen a significant decline

“It remains unclear whether the recovery seen in the winter months has simply been interrupted, or whether the economy is continuing to experience a recession” stated Oliver Holtemöller, Head of Macroeconomics and Vice President of the IWH The labor market shows no signs of easing Capacity utilization in manufacturing has risen marginally despite falling production

Businesses continue to assess their current situation as unfavorable, according to the Ifo Business Climate Index, though expectations are improving This could be attributed to hopes for positive impulses from the extensive public investment program, expected to take effect from 2026 Combined with potentially more expansionary monetary policy, these factors could create favorable conditions for a revival of the German economy

Significant risks to the German outlook remain, particularly surrounding the future of foreign trade The current forecast incorporates losses due to higher US tariffs Additionally, the competitiveness of German manufacturing has been declining relative to foreign competitors over recent years and exports are losing their economic momentum, also due to technological shifts

A notable deterioration in the terms of trade this year, driven by the Euro’s appreciation against both the US dollar and the Chinese Renminbi, adds to these challenges “If exports decline not only in immediate response to the summer tariff increases, but also in subsequent quarters, a recovery in the economic situation is unlikely” cautioned the IWH economic researcher