ifo Economic Forecast Spring 2025: German Economy Treading Water
The German economy is treading water. Structural change and uncertainty are paralyzing industrial activity and the consumer economy. Price-adjusted gross domestic product is expected to increase in 2025 only slightly by 0.2% year over year. As a result, the growth forecast compared to the ifo Economic Forecast Winter 2024 has been lowered by 0.2 percentage points for this year. Growth of 0.8% is expected for the coming year, in line with the ifo Economic Forecast Winter 2024. Against the backdrop of the upcoming economic policy decisions in Germany and the United States, there is a high risk that the forecasts might prove wrong.
Situation of the German Economy
In 2024, gross domestic product fell by 0.2% compared to the previous year and was only just above the average figure for 2019 at the end of the year. There are significant differences between the economic sectors. While construction and industry are deep in recession, the economic output of public service providers expanded strongly. The business-related and consumer-related service sectors tended to move sideways in line with the economy as a whole.
Companies in almost all sectors of the economy are lamenting the shortage of orders. Domestic demand remained subdued despite purchasing power strengthening again and lower interest rates, as there is great uncertainty regarding the course of economic policy in Germany and the geopolitical environment. The situation is particularly bleak in residential construction. Investments there fell by 5.0% last year, the fourth year in a row they have declined. However, there has still not been a recovery in private consumer spending. After adjustment for price effects, it only increased by 0.3%, although real disposable household income rose sharply by 1.3%. Most of the gain in purchasing power went into additional savings, causing the savings rate to rise by one percentage point to 11.4%.
Companies were also reluctant to make purchases last year. Their investments fell by 2.8%. Manufacturing in particular was unable to benefit from the economic recovery in its sales markets. While the world’s gross domestic product increased by 2.7%, 1.7% fewer goods were exported last year than in the previous year. First, this reflects German industry’s loss of competitiveness. In recent years, China in particular has moved from being a buyer of German goods to become a competitor that now offers goods in which Germany used to be the market leader. Last year, German exports to China fell for the third time in a row and were 23% lower than in 2021, after having fueled the German export engine in the 2010s. Second, manufacturing is undergoing fundamental structural change. The growing discrepancy between gross value added and the production index indicates that other value-adding activities beyond the industrial production of goods are gaining in importance. For example, an increasing proportion of sales in manufacturing is attributable to product-related services and income from outsourced production facilities which are tasked with making industrial products in the sales markets or at lower-cost locations, for example. The focus of domestic value creation is shifting from product manufacturing to product development and distribution. Overall, however, the development of gross value added also points to a crisis in manufacturing, particularly in the past year.
“Reliable economic policy is vital to creating confidence and stimulating investment. Companies need planning certainty, especially in view of the current challenges posed by structural change in industry.”
Forecast for the German Economy
The uncertainty about future economic development in Germany is extremely high. On the one hand, the policy of the new US administration is erratic. The “America First” policy was originally expected to give the US economy a boost, but it appears to be having the opposite impact, at least in the short term. At any rate, a number of US economic indicators deteriorated at the start of the year, pointing to a weakening of the previously robust US economy. The looming trade war is also likely to have contributed to this. In any case, the US import tariffs will probably be significantly higher and affect a broader range of goods than expected a few months ago. This forecast assumes that the US administration will now impose tariffs of 25% on all imports from Mexico and Canada (except for energy) and a further 10% on goods from China. In retaliation, the three countries will impose reciprocal tariffs on US imports at roughly the same level. At the same time, it is assumed that no comprehensive US tariffs will be imposed on imports from the European Union.
On the other hand, a new Bundestag was elected in Germany and exploratory talks between potential coalition partners began. It is still unclear what specific economic policy course the new federal government will chart for the coming years. However, there are signs of noticeable additional fiscal spending, particularly in the areas of infrastructure and defense, which could stimulate the German economy in the short term and leverage production potential in the long term. However, it remains to be seen which projects will actually be implemented. This forecast only assumes a situation where the economic and financial policy measures adopted by the outgoing government are maintained. Accordingly, fiscal policy in the current year is noticeably restrictive, which is primarily due to the discontinuation of tax- and duty-free inflation compensation bonuses and the increase in social security contributions.
Overall, the economic outlook for this year remains rather subdued. A number of early indicators suggest that a further decline in economic output is not to be expected, at least at the start of the year. For example, both the order situation in construction and industry and the ifo Business Climate Index did not continue their downward trend in the winter months and appear to have bottomed out. In contrast, the consumer climate has clouded over again in recent months. Overall, however, the survey indicators signal a poor mood among consumers and companies alike, and a fundamental turnaround toward a noticeable recovery is not in sight. All in all, economic output is likely to increase only slightly in the current and coming quarters. For 2025 as a whole, it is anticipated that gross domestic product will therefore be only 0.2% higher than in the previous year. As a result, the growth forecast compared to the ifo Economic Forecast Winter 2024 has been lowered by 0.2 percentage points for this year. Growth of 0.8% is expected for the coming year, which is in line with the ifo Economic Forecast Winter 2024. Against the backdrop of the upcoming economic policy decisions in Germany and the United States, there is a high risk that the forecasts might prove wrong.
In manufacturing, gross value added is likely to continue to decline over the remainder of the forecast period following a positive start to the year. Accordingly, corporate investment and exports will fall again this year and will only increase again slightly next year, driven by an improved trend at business-related service providers. The construction industry as a whole is likely to have bottomed out and will gradually expand slightly again. However, there are still considerable differences between its sectors. While residential construction will probably recover slowly, commercial construction will continue to suffer from the crisis in manufacturing. Public construction should continue to develop robustly.
Private consumer spending is likely to increase only slightly more this year than in the previous year, namely by 0.4% after adjustment for price effects. It is assumed that the savings rate will fall. Purchasing power itself is likely to decline somewhat, as disposable household incomes are expected to increase by 2.0% this year and thus more weakly than the 2.3% rise in consumer prices. On the income side, the expiry of the duty-free inflation compensation bonuses in particular was felt and noticeably dampened the increase in net wages and salaries compared to the previous year. Employment should remain largely stable, and unemployment is expected to fall again from the second half of 2025.
Key Forecast Figures for Germany
| 2023 | 2024 | 2025 | 2026 | |
|---|---|---|---|---|
| Gross domestic product (percentage change over previous year) | -0,3 | -0,2 | 0,2 | 0,8 |
| Employment (1.000 persons) | 46 011 | 46 082 | 46 060 | 46 174 |
| Unemployment (1.000 persons) | 2 609 | 2 787 | 2 889 | 2 791 |
| Unemployment rate (in % of civilian labor force) | 5,7 | 6,0 | 6,2 | 6,0 |
| Consumer prices (percentage change over previous year) | 2023 | 2024 | 2025 | 2026 |
| - Headline inflation | 5,9 | 2,2 | 2,3 | 2,0 |
| - Core inflation | 6,0 | 2,9 | 2,5 | 2,1 |
| Unit labor costs (percentage change over previous year) | 2023 | 2024 | 2025 | 2026 |
| - EUR billion | -103,8 | -118,8 | -93,0 | -107,8 |
| - in % of GDP | -2,5 | -2,8 | -2,1 | -2,4 |
| Balance on current account | 2023 | 2024 | 2025 | 2026 |
| - EUR billion | 243,1 | 248,7 | 187,8 | 165,7 |
| - in % of GDP | 5,8 | 5,8 | 4,2 | 3,6 |
Source: Federal Statistical Office; Federal Employment Agency; Deutsche Bundesbank; 2025 to 2026: forecast by the ifo Institute.
© ifo Institute Mar. 2025
Risks for the Forecast
• Economic policy plans of the new German government
• Structural change in manufacturing
• US economic and, in particular, tariff policy
