The Ifo Institute has significantly revised downward its growth forecasts for the German economy, painting a concerning picture of sluggish expansion and eroding competitiveness. The latest projections indicate a mere 0.8% growth expected by 2026, a substantial downgrade from previous estimates and a barely perceptible 0.1% growth anticipated for this year. This stagnation highlights a growing disconnect between global economic trends and Germany’s ability to capitalize on them.
“The German economy is adapting at a slow and expensive pace to structural change through innovation and new business models” stated Timo Wollmershäuser, head of cyclical research at the Ifo Institute. He pointed to a systemic issue: burdensome bureaucracy and outdated infrastructure are demonstrably inhibiting both established firms and nascent startups, preventing the vibrant dynamism needed for sustained growth.
Revisions across the forecast period reveal a consistent downward trend. The 2025 projection has been lowered by 0.1 percentage points, while 2026 and 2027 have been revised down by 0.5 percentage points each, reflecting a broader lack of confidence in the nation’s economic trajectory. The persistent impact of US trade policies continues to weigh heavily on Germany’s export sector, with increased tariffs projected to dampen growth by 0.3 percentage points in 2025 and 0.6 percentage points in 2026.
While geopolitical tensions between the US and the EU have seemingly eased, the lingering uncertainty surrounding trade policy remains a significant impediment. “The uncertainty created by tariffs persists, even with the abatement of acute conflicts between the US and the EU” Wollmershäuser noted, underscoring the fragile nature of current economic stability. Despite a moderate global economic growth averaging 2.5% annually between 2025 and 2027, the German industrial base is failing to benefit, demonstrably losing ground in the international arena.
Government investments channeled through special purpose vehicles earmarked for infrastructure and defense, alongside planned tax relief for businesses and consumers, are proving inadequate and impacting growth with a substantial delay. A marginal boost of 0.3 percentage points is expected for 2026, rising to 0.7 percentage points in 2027. However, Wollmershäuser cautioned that these measures are “short-term fixes” that “do not suffice to sustainably expand the production capacities of the German economy.
The Ifo Institute has also sharply revised its long-term production potential downward, now projecting an output 0.7 percentage points lower than previously forecast. The core issue, according to Wollmershäuser’s assessment, lies in a confluence of declining factors: a shrinking labor pool, insufficient business investment and stagnating productivity. “Without structural reforms, a further erosion of Germany’s attractiveness as a business location is inevitable. Actions are needed to bolster labour supply through incentives for extended working hours or broader workforce participation and to improve productivity by embracing digitalization and streamlining government processes.
The revised forecasts also indicate a concerning rise in unemployment, projected to climb by 161,000 individuals in 2025, reaching 6.3%. Inflation is expected to remain stubbornly above the 2% target (2.2% in 2025, 2.2% in 2026 and 2.3% in 2027), driven by persistent high service prices and evolving labour costs which are counteracting falls in energy prices. The overall picture paints a portrait of an economy struggling to adapt, requiring fundamental structural reforms to avert a potentially prolonged period of stagnation and diminished global competitiveness.
