A turning point for the German economy?
The announcements and decisions made by the new US administration, particularly regarding its position in the Russia-Ukraine conflict and its tariff policy, have led to high uncertainty worldwide and recently caused US share prices to fall significantly. Meanwhile, the global economy is likely to have continued expanding moderately during winter. The economy remained robust in the US, but weak in the euro area. In the US, the negative effects of economic policy uncertainty and higher tariffs are likely to roughly balance out the short-term positive effects of deregulation. In China, the property crisis is continuing for the time being, while the success of the DeepSeek chatbot app has improved the outlook for the Chinese tech sector. In the euro area, the economy will remain weak in 2025
In Germany, CDU/CSU and SPD have agreed to de facto suspend the debt brake in order to finance rearmament and additional public infrastructure investments. “The additional public spending should gradually have a stimulating effect on the economy,” says Oliver Holtemöller, head of the Macroeconomics Department and Vice President at the IWH. “The policy shift comes against the backdrop of an economy in crisis, with a loss of international competitiveness and weak investment.” The decline in production in the fourth quarter of 2024 was primarily due to lower exports, and investment in equipment has fallen further. The unemployment rate continues to rise slowly, and employment growth has recently come to a standstill. Private households are adapting to the economic crisis by being more cautious with their spending: their savings rate is at present significantly higher than the long-term average. In this forecast, we assume that the infrastructure fund will indeed be set up and that military spending will be significantly higher. However, all this will hardly have any real economic impact in the current year, but only in later years. In addition, the sharp rise in social security contributions has a negative impact on disposable income. “All in all, gross domestic product in Germany is likely to stagnate in 2025, as will the number of employed persons,” says Oliver Holtemöller. The general government budget deficit is likely to amount to 2.7% in 2025 and rise to 3.2% in 2026.
Risks for the German economy arise primarily from the uncertain political environment. The uncertainty surrounding US trade policy is having a particularly strong impact on the German economy, as the US is by far the country to which most German exports are shipped. Furthermore, deficit-financed expansion of government spending in Germany and Europe entails its own considerable risks. A loss of investor confidence could quickly put euro area countries with high levels of debt into financial difficulties, which the European Central Bank (ECB) according to the IWH economists would probably counter with purchases of the affected government bonds. In such a case, European monetary policy, dominated by fiscal considerations, would risk losing its focus on price stability.
The extended version of this forecast contains three boxes (all in German):
Box 1: On the estimation of potential output
Box 2: Effects of CO2 pricing on consumer prices in Germany
Box 3: Short-time work on the rise again ― focus shifts to the manufacturing sector
Publication:
Drygalla, Andrej; Exß, Franziska; Fourné, Marius; Heinisch, Katja; Holtemöller, Oliver; Kämpfe, Martina; Lindner, Axel; Mukherjee, Sukanya; Sardone, Alessandro; Schultz, Birgit; Zeddies, Götz: Konjunktur aktuell: Zeitenwende für die deutsche Wirtschaft? IWH, Konjunktur aktuell, Jg. 13 (1), 2025. Halle (Saale) 2025.
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Related Publications
Konjunktur aktuell: Zeitenwende für die deutsche Wirtschaft?
in: Konjunktur aktuell, 1, 2025
Abstract
<p>Die Ankündigungen und Entscheidungen der neuen US-Regierung um den Russland-Ukraine-Konflikt und die Zollpolitik haben weltweit zu hoher Unsicherheit geführt. Im Euroraum bleibt die Konjunktur schwach. Auch die deutsche Konjunktur ist weiter im Abschwung. Das Bruttoinlandsprodukt dürfte im Jahr 2025 um 0,1% und im Jahr darauf um 1,3% zunehmen.</p>
