German economy: stagnation instead of shrinking – what will happen in 2025?

German economy: stagnation instead of shrinking – what will happen in 2025?

The economic prospects for Germany in 2025 show a mixed picture, as KfW expects stagnation but not shrinkage. According to current forecasts, zero growth is expected for 2025, instead of an originally calculated decline of 0.2 percent. This would be a turnaround after three years of recession in a row Small newspaper reported.

The first quarterly figures indicate unexpected growth. In the first quarter of 2025, the German economy grew by 0.4 percent, which was twice as much as analysts' expectations. The reasons for this are pull-forward effects in exports, which were influenced by the tariff conflict with the USA. Positive impulses could also come from the European Central Bank's monetary policy and rising real wages, while private consumption is still seen as weak as real wage dynamics are slowing and the savings rate remains high.

Forecasts and expectations

The KfW is raising the GDP forecast for 2026 by 0.7 percentage points to an increase of 1.0 percent. At the same time, the RWI plans to present an improved estimate of gross domestic product (GDP) in June. This increase could also be related to debt brake reforms and planned investments by the federal government, which could give the economy a growth boost.

Although the expected development shows stagnation in 2025, there is still every reason for hope. Deutsche Bank experts are cautiously optimistic and expect the German economy to avoid a recession in 2024, with a forecast of 0.3 percent GDP growth for the coming year.

Inflation and the Eurozone

The KfW has also raised its inflation forecast for Germany in 2025 to 2.4 percent. This represents an increase from the previous estimate of 2.1 percent. There are also fears that the inflation forecast for the euro zone will be raised to 2.2 percent. For 2026, slight GDP growth of 0.3 percent is forecast in Germany, while real growth of 0.6 percent is forecast in the Eurozone. Spain could achieve the highest real growth among the largest eurozone countries.

Despite the uncertainties on the markets and companies' gloomy business expectations, the situation remains complex, but hopes for stability are growing. The KfW and other institutions continually update their forecasts to reflect changing economic conditions.