German Economic Recovery Delayed

By Christian Kraemer and Maria Martinez

Overview

BERLIN (Reuters) – Germany’s long-awaited economic recovery has been postponed once again, as the government cut its forecasts for this year amid trade tensions and growing domestic uncertainty over the upcoming election.

Forecasts

The annual government report presented on Wednesday stated that Germany’s economy, still the largest in Europe, is expected to grow by 0.3% this year, down from a previously forecast 1.1%. This indicates little sign of recovery from two years of contraction.

Reasons for Stagnation

The dispute over how to revive Germany’s ailing economy contributed to the collapse of the government in November, paving the way for snap elections on February 23.

“Germany is stuck in stagnation,” said Economy Minister Robert Habeck on Wednesday. He noted that the anticipated growth has been delayed this year.

Future Growth

A expected recovery in 2026 foresees growth of 1.1%. Habeck cited three reasons for the forecast reduction in 2025:
1. A growth initiative that could not be implemented due to the collapse of the ruling coalition.
2. Uncertainty surrounding the upcoming snap election.
3. Geopolitical risks, particularly in relation to U.S. President Donald Trump’s potential re-election.

Opposition Criticism

The vice-chair of the opposition conservatives, CDU‘s Jens Spahn, criticized Habeck, stating that even the mini-growth forecast is overly optimistic. He noted that Germany may face its third year of recession, while other industrialized nations are experiencing growth.

Leading associations criticized the government for underestimating challenges, claiming Chancellor Olaf Scholz has mischaracterized the situation as merely cyclical rather than structural.

Marie-Christine Ostermann, head of the Association of Family Entrepreneurs, reflected on the sentiment of entrepreneurs, saying Germany is becoming a difficult place to do business.

Investment and Policy

Habeck focused on underinvestment, highlighting that Germany has had a more restrictive fiscal policy than other G7 countries, limiting growth. He called for a reform of the debt brake that restricts public borrowing.

Inflation is projected at 2.2% in 2025, with expectations to fall below the European Central Bank’s target of 2% in 2026. Unemployment is also predicted to rise to 6.3% from 6.0% last year.

Trade Outlook

The report anticipates a 0.3% decline in German exports in 2025 due to decreasing competitiveness coupled with growing geopolitical tensions. The BDI industry association warned that Trump’s return to the White House and his tariff threats could lead to a 0.5% contraction in Germany’s export-driven economy.

Habeck emphasized the need to avoid tariffs, arguing they negatively affect investments and increase product costs, particularly detrimental to Germany as an export nation.

The 147-page report stressed the importance of maintaining and ideally expanding close trade relations with the U.S., urging the EU Commission to expedite further trade agreements.