The German economy is facing a protracted period of stagnation and declining competitiveness, according to a revised forecast released Thursday by the Ifo Institute. The latest projections significantly downgrade growth expectations, highlighting structural weaknesses and external pressures that threaten Germany’s traditionally robust economic standing.
The Institute now anticipates a mere 0.8% growth rate for 2026, a substantial downward revision from previous estimates. Growth for 2025 is projected at a meager 0.1%, reflecting a discernible slowdown in economic activity. These revisions represent a considerable setback for policymakers and raise concerns about Germany’s ability to navigate evolving global economic conditions.
Timo Wollmershäuser, Head of Macroeconomic Forecasting at Ifo, attributed the sluggish performance to a slow and costly adaptation to structural change. “The German economy is adapting to the structural transformation through innovation and new business models with difficulty and at a high cost” he stated. He further emphasized the impediments faced by businesses, particularly startups, which are hampered by bureaucratic burdens and outdated infrastructure.
The imposition of US tariffs continues to weigh heavily on the export-oriented German economy, directly impacting growth trajectory. The Ifo Institute estimates that higher US tariffs will dampen growth by 0.3 percentage points in 2025 and by 0.6 percentage points in 2026, a tangible illustration of the vulnerabilities stemming from international trade disputes. While tensions between the US and the EU have eased, uncertainties surrounding trade policy remain a persistent drag on the German business climate.
Government investment initiatives channeled through special-purpose funds, designed to bolster infrastructure and defense, along with measures intended to alleviate pressure on businesses and consumers, are proving to be largely delayed in their impact. The Institute forecasts a marginally beneficial impact of 0.3 percentage points in 2026 and 0.7 percentage points in 2027, characterizing these efforts as insufficient to address the underlying structural limitations impacting German production capacity.
The revised forecast paints a worrying picture of diminished economic potential, with a 0.7 percentage point reduction in the Institute’s long-term projections for 2027 compared to prior estimates. Wollmershäuser cautioned, “The German economy is losing dynamism because the labor potential, corporate investment and productivity growth are shrinking”. He underscored the urgency of implementing fundamental reforms to revitalize the economy and avert further erosion of Germany’s competitive edge. This includes stimulating the labor market through incentives to expand working hours and boosting productivity through digitalization and streamlining government processes.
The tightening labor market will also see unemployment rise in 2025, with an estimated 161,000 additional individuals seeking employment, pushing the unemployment rate to 6.3%. While unemployment is expected to plateau in 2026, a slight improvement to 5.9 percent is forecast for 2027, dependent on successful implementation of reform measures. Inflation is projected to remain stubbornly above the 2 percent target, hovering around 2.2 to 2.3 percent annually, indicating ongoing inflationary pressures despite falling energy prices.