German economy faces prolonged slowdown amid structural shifts: ifo

Economists note that Germany is undergoing a profound transformation driven by decarbonisation, digitalisation, demographic shifts and ongoing geopolitical disruptions. Compared with other advanced economies, adaptation has been slower and more costly, largely because manufacturing plays a disproportionately large role in the country’s economic structure and is particularly exposed to these changes. More pronounced demographic ageing is further constraining labour supply and productivity growth, said the latest ifo Economic Forecast Winter 2025.

Structural bottlenecks are also holding back momentum. Bureaucratic complexity and infrastructure gaps continue to hinder production and start-up activity, limiting innovation and new business formation. From a macroeconomic perspective, these challenges are reflected in both a downward revision of potential output in recent years and a slower expected growth rate of potential output going forward, significantly reducing the scope for a strong cyclical recovery.

While recent economic policy measures may offer short-term support, analysts caution that they are unlikely to lift potential growth or materially accelerate long-term expansion. Additional pressure is coming from higher US import tariffs, which are weighing on Germany’s export-oriented industries. Structural change is therefore expected to remain a defining feature of the economic outlook over the forecast period.

Compared with the ifo Economic Forecast published in autumn 2025, growth projections have been revised down by 0.1 percentage points for 2025 and by 0.5 percentage points for both 2026 and 2027, largely due to a reassessment of Germany’s potential output.

On the labour market, employment is expected to remain broadly stable, with total employment dipping slightly from around 45.99 million in 2024 to 45.95 million in 2026 before edging up in 2027. Unemployment is forecast to rise to nearly 3 million people in 2025 and 2026, pushing the unemployment rate to around 6.3 per cent, before easing to 5.9 per cent in 2027. Inflation is projected to remain relatively contained, with headline consumer price inflation holding at about 2.2 per cent through 2026 and edging up to 2.3 per cent in 2027, while core inflation gradually moderates.

Germany’s public finances are also set to remain under strain. The general government deficit is forecast to widen again after 2025, reaching €151.8 billion in 2026 and €167.9 billion in 2027, equivalent to 3.3 per cent and 3.5 per cent of GDP respectively. Meanwhile, the current account surplus is expected to continue narrowing as a share of GDP, reflecting weaker export dynamics and stronger domestic demand over time.

Globally, the outlook remains shaped by US tariff policy, which continues to cast a shadow over international trade in winter 2025. While greater clarity around the new trade regime has reduced uncertainty, the economic impact of tariffs is expected to dampen global growth in the coming months. The world economy is forecast to expand by an average of 2.5 per cent per year between 2025 and 2027.

Global trade is expected to see a temporary boost in 2025 as companies pull forward activity ahead of tariff increases, before contracting slightly in 2026 and resuming growth in 2027, albeit at a slower pace than global output. In the United States, part of the tariff burden is likely to be passed on to consumers, with price pressures spreading along value chains, even as investment linked to artificial intelligence continues to support growth.

China is expected to remain weighed down by persistent external and domestic imbalances. Despite official measures to curb price declines from intense industrial competition, the ongoing real estate crisis is set to continue restraining private consumption and construction investment. In the eurozone, growth is not expected to accelerate meaningfully, with rising real incomes supporting consumption and easier financing conditions gradually aiding investment. However, US tariffs, stronger competition from China and a firm euro are likely to dampen export prospects across the region.

“The German economy is adapting only slowly and at great expense to the structural shift through innovation and new business models,” said Prof Dr Timo Wollmershauser, deputy director of the ifo Center for Macroeconomics and Surveys and Head of Forecasts.

ALCHEMPro News Desk (SG)