Germany's Economy Expected to Grow 0.2% in 2025

Germany's economy is expected to return to growth in 2025 after experiencing two years of contraction, according to analysts. The forecast indicates a modest expansion of 0.2% for the year, marking a shift from the stagnation predicted in previous polls. This positive outlook is attributed to various factors, including the implementation of measures from the new federal government's emergency program, which some analysts believe point in the right direction.

However, there are also significant challenges that could hinder growth. Dennis Huchzermeier, senior economist at the Handelsblatt Research Institute, noted that while some measures are positive, there are "significant burdens" such as the increase in the minimum wage and a potential surge in social security contributions. These factors could pose obstacles to the economy's recovery.

Germany's economic performance in the first quarter of 2025 was stronger than expected, partly due to businesses and exporters trying to preempt anticipated US tariffs. This early momentum could be reversed, adding to the uncertainty surrounding the economic outlook. The Bundesbank, Germany's central bank, initially predicted stagnation for the year, citing trade uncertainty and other challenges faced by firms. This view aligns with many national forecasters and global institutions, including the International Monetary Fund.

Despite the cautious outlook, Bundesbank President Joachim Nagel expressed a slightly more optimistic view. He suggested that the recent upward revision to first-quarter output data could push the overall economic output for 2025 above zero. This perspective indicates a potential for slight economic growth, although the overall outlook remains uncertain.

Looking ahead to 2026 and 2027, analysts project more robust growth as government outlays on infrastructure and defense increase. The Ifo Institute, a prominent economic research organization, raised its growth projection for 2026 by 0.7 percentage points to 1.5%, citing increased fiscal spending. The IfW in Kiel expects expansion of 1.6% for the same year. Ifo President Clemens Fuest emphasized that achieving 2% growth, a goal discussed by Chancellor Friedrich Merz, would require significant reforms. He noted that financial investments alone are not sufficient and that Germany needs a willingness to reform in several areas to overcome the economic challenges.