German economy stuck in slow lane, institutes say

[BERLIN] Germany’s economy has stabilised but remains stuck in a phase of meagre growth, with a planned fiscal expansion from next year set to provide limited momentum, three German economic institutes said on Thursday (Dec 11).

The Ifo Institute cut its growth forecast from 2025 to 2027, expecting growth of 0.1 per cent for this year, down from 0.2 per cent previously.

It expects growth of 0.8 per cent next year and 1.1 per cent in 2027, cutting by 0.5 percentage points the forecasts for both years.

“The German economy is adapting only slowly and at great expense to the structural shift through innovation and new business models,” said Timo Wollmershaeuser, head of forecasts at Ifo.

He added that companies, and start-ups in particular, are hindered by red tape and an outdated infrastructure.

US tariffs continue to have a noticeable impact on the German export industry. According to the Ifo forecasts, higher tariffs will dampen growth by 0.3 percentage points in 2025 and by 0.6 points in 2026.

The Kiel Institute forecasts growth of 1.0 per cent next year in Europe’s biggest economy, down from its autumn forecast of 1.3 per cent. It foresees a 1.3 per cent expansion in 2027, slightly above the 1.2 per cent previously expected.

Growth of only 0.1 per cent is forecast for this year following two years of economic contraction. The Kiel Institute said strong headline growth rates in 2026 and 2027, driven partly by government stimulus and more working days, would mask persistently weak underlying conditions.

“A self-sustaining upswing is still not in sight,” the report said.

Along the same lines, the Leibniz Institute for Economic Research RWI on Thursday cut its growth outlook for 2026 and warned that Berlin is rolling out higher public investment in infrastructure too slowly to offset weak demand and falling private investment.

The economic research group expects Germany’s economy to expand by just 0.1 per cent in 2025, followed by growth of 1.0 per cent in 2026 and an unchanged 1.4 per cent in 2027. RWI had previously expected growth of 0.2 per cent for this year and 1.1 per cent next year.

The hoped-for stimulus from the 500-billion-euro (S$757.4 billion) special fund for infrastructure and climate neutrality is still failing to materialise, the institute said.

“The later they arrive and the more fundamental reforms fail to materialise, the greater the damage to the German economy,” said Torsten Schmidt, RWI chief economist.

The German economy stagnated in the third quarter and, according to RWI, there is no sign of a clear turnaround towards the end of the year.

Germany’s general government budget deficit is projected to widen from 2.4 per cent of GDP in 2025 to 4.0 per cent in 2027 with the increase in public spending, according to the Kiel Institute.

The labour market is expected to recover gradually as activity picks up, with the unemployment rate falling from 6.3 per cent this year to 5.9 per cent in 2027, Kiel forecasts. However, larger employment gains will increasingly be constrained by a demographic shortage of workers, the report said. REUTERS