German economy 2025: stagnation and rising unemployment!

German economy 2025: stagnation and rising unemployment!

The German economy is expected to stagnate in 2025. According to the economists, such as from The Pioneer reported, the assessment has deteriorated sharply compared to the autumn forecast for 2024, which predicted growth of 0.4 percent for this year. Experts do not expect a slight recovery of 1 percent until 2026. The current situation is described as a “pronounced phase of weakness”, which is caused by various internal and external stress factors.

Internal challenges such as bureaucracy, the push for faster approval procedures, reduced information requirements and the digitalization of administration are putting a strain on economic dynamism. Externally, trade policy uncertainties, especially due to Donald Trump's customs policy, are causing additional uncertainty that affects the export-oriented German economy.

Inflation and unemployment

The forecasts also predict an increase in unemployment to up to 6.2 percent. The IMK draws attention to the fact that an increase to 6.3 percent is possible and that employment is expected to decline by 0.2 percent in 2025. Inflation is also expected to reach 2.1 percent and fall to 2 percent by 2026, although uncertainties remain due to trade conflicts and government spending programs.

The price increase in services is expected to normalize, which is due to declining wage dynamics and slowing price increases in other areas. Nevertheless, risks of war and possible price-increasing measures by the new federal government cannot be ruled out.

Investments and infrastructure

A 500 billion euro investment package from the new government is seen as an opportunity to counteract the current economic situation. However, the experts emphasize that a large part of the funds should not only be used for consumption or budget items that have already been planned. At least 10 percent should be reserved for investments in digital infrastructure and research in order not to hold back the necessary structural change. Monika Schnitzer, the chairwoman of the council, warns against economic policies that want to prevent structural change with subsidies.

Investment activity, on the other hand, is being slowed by high interest rates, particularly in the construction sector, which is unsettling both households and companies. Despite a possible trend towards stable prices for residential property in 2025, an investment backlog remains, while municipalities are coming under severe pressure from increasing social spending.

Outlook for 2026

Economic experts agree that the structural challenges will continue. A slight upturn of probably 1 percent is only expected in 2026. The interest rate decision by the European Central Bank (ECB) is also likely to play a role, with interest rate cuts forecast for the first half of 2025. The ECB could intervene in market turmoil to counteract a new outbreak of the euro crisis.

In summary, the signs for the German economy in 2025 are stormy, with a multitude of challenges and only limited prospects for future growth.