The German government expects a growth rate of only 0.3 percent for the country’s gross domestic product in the year 2025. “We are reducing the growth forecast from 1.1 percent to 0.3 percent” said Economy Minister Robert Habeck (Greens) at the presentation of the annual economic report on Wednesday.
This is primarily due to three reasons. Firstly, the “growth initiative” of the broken coalition government has not been fully implemented. “We had calculated a growth impulse of around half a percent” Habeck said. This will no longer be the case.
Secondly, the premature new election is leading to ongoing political uncertainty, which is a logical consequence of the election, the minister said. “People are now hearing different programs and are thinking about whether to invest or buy something and maybe they will hold back because they want to see if there will be any subsidies, tax cuts, or something else” Habeck said. This is a hangover from the premature election.
Thirdly, the external or geopolitical uncertainty on the markets, particularly due to Donald Trump’s election and the announcement of tariffs, is a factor, the minister explained. The threatened tariffs themselves are not yet included in the annual economic report, Habeck said. “I am once again urging that we make all efforts to avoid these tariffs.”
Tariffs would make goods more expensive and prevent common markets, the minister said, looking at the upcoming vote in the Bundestag on border controls. “This is threatening for an export nation like Germany, but it is ultimately to the detriment of the people in the respective economic areas” Habeck said, also looking at the European internal market.
Growth impulses are expected to come primarily from private consumption and, in the course of the year, also from investments, as shown by the annual economic report. Due to still declining exports and rising imports, the foreign trade is expected to make a “noticeably negative contribution to growth” the report says.
The government expects a stagnation of employment in the current year, with unemployment likely to continue to rise, according to the forecast. Last year, a new high was reached in employment, with around a million more people in work than in 2021.
The domestic demand is expected to develop slowly in the face of ongoing geopolitical uncertainty and the still unclear economic and financial policy orientation of the next government, the report says. With decreasing inflation, rising real incomes and increasing clarity about the economic framework, a growing domestic dynamic is expected in the later part of the year. The increase in consumer prices is expected to be around 2.2 percent on average, just above the target of 2 percent.
“The German economy is starting the year 2025 in a difficult situation” said Habeck. “The global crises of the past years have particularly hard hit our industry- and export-oriented economy. While the energy crisis, triggered by Putin’s war of aggression, was successfully averted and inflation was brought under control and there are again noticeable real wage increases, people have more money in their pockets” the Green politician said.
“But it has become even more clearly evident that Germany is suffering from fundamental structural problems: the labor and skilled labor shortage, the overburdening bureaucracy, the investment weakness, both in private and public investments and it’s all booked to the tune of a crumbling bridge” the minister said.
At the same time, the current high uncertainty with regard to the US economy and trade policy, as well as the uncertainty about the future economic and financial policy course in the face of the upcoming federal election, is dampening the investment and consumption mood. “The important impulses that were agreed upon with the growth initiative were unfortunately not able to be implemented to a large extent after the end of the coalition government” Habeck said. “That’s why we have corrected the growth forecast for this year downward in the annual projection.”
But the country still has great strengths, the minister said. The “diverse company landscape, our innovation power, our start-up scene and our openness to trade and skilled workers from abroad” are a good starting point for a new dynamic.
In the medium-term perspective, the consequences of the demographic change on the labor market are expected to increasingly dampen the growth potential, according to the ministry. Additionally, the geopolitical shift and a world economy with increasingly confrontational trade practices pose structural challenges to the open German economy.