Germany's economic recovery is showing signs of momentum, according to the latest summer forecast from the ifo Institute. The Munich-based research body has revised its GDP growth projections upward, now expecting the German economy to grow by 0.3% in 2025 and 1.5% in 2026, an increase of 0.1 and 0.7 percentage points respectively from its spring forecast.
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'The crisis in the German economy reached its low point in the winter half-year,' said Timo Wollmershäuser, Head of Forecasts at ifo. He added, 'One reason for the growth spurt is the fiscal measures announced by the new German government.'
Economic output rose sharply by 0.4% in the first quarter of 2025, a surge driven in part by front-loaded exports to the US ahead of anticipated tariff hikes. Strengthening private consumption and investment, along with improving business sentiment, further contributed to the positive result. 'The growing optimism is probably also being fuelled by the hope that the new coalition will end the economic stagnation, and an agreement will be reached in the trade dispute with the US,' Wollmershäuser explained.
The new German government's economic agenda includes expanded infrastructure and defence spending, tax relief through accelerated depreciation, reduced grid fees, and a higher commuter allowance. The ifo Institute estimates these measures will inject €10 billion into the economy in 2025 and €57 billion in 2026, lifting GDP growth by 0.1 percentage points this year and 0.7 percentage points next year.
However, risks remain. 'The import tariffs already imposed, assuming they remain at the current level, will impact economic growth by 0.1 percentage points in 2025 and 0.3 percentage points in 2026,' the forecast warns. An escalation in the US-EU trade dispute could risk triggering another downturn, while a resolution may unlock further growth potential.
Inflation is expected to ease slightly, with rates forecast at 2.1% in 2025 and 2.0% in 2026. The labour market is set to stabilise, with unemployment projected to rise modestly to 6.3% in 2025 before falling to 6.1% the following year.
More information:
ifo Institute
www.ifo.de