German economy expected to grow by 0.2% in 2025, supported by increased spending on infrastructure and defense
Five major German economic institutes have raised their 2025 growth forecast for Europe's largest economy to 0.2%. The institutes had predicted growth of 0.1% this year and 1.3% next year in their projections in April.
The new government's plans to significantly increase spending on infrastructure and defense are expected to support growth in the long term, but the economy will struggle for the time being, battered by the US administration's global trade war.
For next year, the institutes maintained their forecast of 1.3%, as government spending should help the economy gain momentum.
German Chancellor Friedrich Merz took office in May promising to revive stagnant growth. While it was clear that the promised increase in public spending would take time to benefit the economy, there is a growing sense that the promised reforms are slower and less far-reaching than initially expected.
Economists from these institutes are calling for massive structural reforms by the new government so that the economy is future-proof in the long term.
The institutes will present their new joint report to the government on Thursday. The economy ministry includes the combined estimates from the institutes in its own forecasts. The government's latest forecasts, published in April, predict stagnation this year and growth of 1% in 2026. The government will update its forecasts in the autumn, taking into account the latest insights from the economic institutes.
The Organization for Economic Co-operation and Development lowered its economic outlook for Germany on Tuesday, expecting GDP to expand by 0.3% in 2025 and 1.1% in 2026, 0.1 percentage point below its previous forecasts in both years.
Previous projections had included initial US tariffs on steel, aluminum and cars, but not the 15% tariff on other goods.
Germany, dependent on exports, is the only G7 economy to have shrunk over the past two years.
Germany has struggled to regain momentum this year, with the economy shrinking by 0.3% in the second quarter compared with the first three months of the year, while US demand slowed after months of pre-emptive buying in anticipation of US President Donald Trump's new tariffs.
The weak economy has left its mark on the labor market, and in August the number of unemployed in Germany exceeded 3 million for the first time in a decade.
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