Joint Economic Forecast Spring 2025: Geopolitical Upheaval Exacerbates Crisis – Structural Reforms Even More Urgent

Gross domestic product is likely to do little more than stagnate this year with an increase of 0.1 percent. The institutes are therefore revising the forecast from fall 2024 downward by a significant 0.7 percentage points. Momentum in the summer half-year of 2025 is now assessed as weaker due to the US tariff policy.

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German Economy Still in Crisis

The German economy is still in crisis, characterized by significant domestic and foreign policy changes at the start of 2025. Economic policy uncertainty in Germany is high, particularly due to the change of government. The protectionist trade policy of the United States is also weighing on the German economy. In this context, the Bundestag and Bundesrat have fundamentally changed Germany’s financial constitution, which creates far-reaching public scope for debt.

Economic weakness in Germany is both cyclical and structural in nature. German companies are facing intense international competition, particularly from China. Since the energy crisis, part of production in energy-intensive industry has also been permanently lost. A shrinking working population and high levels of bureaucracy are exacerbating the structural weaknesses of the German economy. It remains unclear how the new German government will respond to these challenges. Nevertheless, the constitutional amendments provide greater scope for debt, which can be used for defense, climate protection and infrastructure.

Short-term economic activity will be affected by the new US tariffs and the continuing uncertainty. The trade conflict, particularly as a result of car tariffs, could reduce gross domestic product by 0.1 percentage points in this year and the next. And that doesn’t yet take account of the effects of the newly introduced tariffs. If these tariffs remain in place, the dampening effect of the US tariff policy could even be twice as strong. However, the concrete effects are difficult to quantify, as tariff rates have never been raised so much in the current globalized economic structure.

GDP is forecast to rise by just 0.1 percent this year, which represents a significant downward revision of the fall forecast by 0.7 percentage points. Weaker momentum is expected especially in the summer half-year of 2025 due to the US tariff policy, which will delay recovery. An anticipated expansionary fiscal policy is likely to stimulate the economy in the remainder of the forecast period. GDP is forecast to rise by 1.3 percent in the coming year, with 0.3 percentage points attributable to the higher number of working days. However, the level of economic output remains 0.8 percent lower than estimated in the fall.

The US trade policy poses considerable risks for economic development in Germany. The announced tariff increases indicate a possible escalation, the negative impact of which on both economic areas could be greater than assumed in the current forecast. Negotiations between the EU and the US could, however, defuse the transatlantic conflict. In addition, the macroeconomic effects of the higher spending on defense and investment made possible by the constitutional amendment are subject to great uncertainty, as they depend on many currently unknown factors.

Joint Economic Forecast Spring 2025, Gross Domestic Product in Germany

Global Economy in Upheaval

In spring 2025, the global economy is facing far-reaching geopolitical and economic policy changes. The shift in policy in the US has created new security challenges in Europe. The US government has begun to erect new trade barriers, slowing global trade and raising production costs. This unpredictability of trade policy measures leads to economic uncertainty, which inhibits investment.

Monetary policy in advanced economies has lowered interest rates further, while inflation is only falling slowly. In the eurozone, the key interest rate stands at 2.5 percent and could soon reach a neutral level, meaning that the ECB will probably only make one more interest rate cut. In the US, the key interest rate stands at 4.5 percent. As inflation is likely to increase further, mainly due to the tariff policy, interest rates are likely to be cut only slightly at best.

Financial policy is likely to change course in many countries. Fiscal rules are to be relaxed in the eurozone in order to increase defense spending. The situation in the US is unclear. There are plans to keep tax breaks while at the same time cutting spending. The budget deficit in the US is expected to remain high.

The pace of expansion in advanced economies will slow, primarily due to a slowdown in the US economy. In the eurozone, on the other hand, recovery is making slight progress, supported by gains in purchasing power and better financing conditions. Nevertheless, uncertainty and trade barriers are weighing on the European economy.

The outlook for emerging markets, particularly China, has deteriorated due to the US tariff policy, which could slow down the expansion of the Chinese economy. The higher tariffs could also lead to a decline in foreign direct investment. The institutes expect global production to grow by 2.4 percent in the coming years, which is significantly lower than in recent years. World trade will probably grow by only 2.1 percent and 1.6 percent respectively, which is less than previously expected. The risks for this forecast are high, as the impact of the US tariff policy is difficult to predict.