RWI Konjunkturberichte

The German economy was under considerable pressure in the first half of 2025. The announcement of new US tariffs on EU imports led to goods exports being preponded. This initially caused GDP to rise sharply in the first quarter, but then led to a countermovement in the second quarter. Although the EU Commission and the US government have now reached an agreement, the terms remain vague. The risk that the conflict will reignit is therefore quite high. In addition, the protracted budget negotiations of the new federal government and the dispute over key economic and social policy issues have caused uncertainty. This is likely to have contributed to the decline in private investment in the second quarter. Consumers also spent less on consumer goods again in view of the weak labour market. All of this has led the underlying economic momentum to remain rather weak. Although the recently revised data show that the decline in GDP had already come to a halt by the middle of last year and that a recovery began in the second half of 2024, the impact of US tariff policy has slowed this upward trend. Without the pull-forward effects in foreign trade, economic output would likely have risen only slightly in the first half of the year. The economy should gain some momentum in the second half of the year. The first signs of this are already visible: foreign orders have risen recently, and the container throughput index for July also points to an increase in exports from European ports. However, US foreign policy remains a negative factor. We assume that uncertainty will persist and continue to slow down global trade. On a positive note, the measures adopted by the federal government to strengthen the economy are gradually stimulating domestic demand. In addition to the special fund for infrastructure and the amendment to the Basic Law for higher defence spending, the immediate investment programme also came into force in July. In our forecast, we assume that from next year onwards, funds from the special fund will increasingly be channelled into infrastructure and defence. This should provide a stimulating boost. However, as capacity in these areas is already heavily utilised, we also expect prices to rise. Against this backdrop, we expect overall economic output to expand only modestly in the second half of the year. It is only from next year onwards that economic policy measures are likely to drive the domestic economy more strongly. We expect GDP growth of 0.2% for this year. In 2026 and 2027, economic output is likely to expand much more strongly at 1.1% and 1.4%, respectively. This means that growth in the coming year will be well above the production potential, which is estimated at around 0.3%. Accordingly, the output gap is likely to narrow noticeably. There were hardly any changes in the labour market in the second quarter of 2025. Declines in manufacturing and construction were offset by growth in the service sector. We expect a moderate improvement in the coming months: employment is likely to rise slightly and unem-ployment to stabilise. We anticipate an annual average of 46 million people in employment in 2025. After that, the number will decline slightly – by around 12,000 in 2026 and by a further 22,000 in 2027. The unemployment rate is expected to average 6.3% in 2025, falling to 6.2% in 2026 and to 6.1% in 2027. The inflation rate stood at 2.2% in August. Low energy prices and the stronger euro had a dampening effect. However, excluding food and energy, inflation was 2.7%, which was above the overall rate. While service prices increased by 3.8% in the previous year, they have shown a clear downward trend in recent months. We expect prices to rise by 2.0% for 2025 as a whole. Inflation in services is likely to normalise further in the coming year, while energy prices will have a dampening effect. Overall, we expect inflation to fall further to 1.8% in 2026. For 2027, we anticipate a slight increase to 2.0%. This year, fiscal policy is slightly restrictive, due mainly to the significant increase in the additional contribution to statutory health insurance and the expiry of the inflation adjustment premium. This is offset by relief measures such as the Tax Development Act and higher spending on defence and infrastructure. In the current year, these additional expenditures are still rela-tively small, but they will increase significantly in 2026 and 2027. We expect a strong stimulus of 0.9% in each of the next two years. The general government financing deficit is likely to fall slightly to €116 billion this year. In 2026, however, the higher expenditure will have a noticeable impact, causing the deficit to rise to €158 billion. In 2027, it is likely to grow further to €170 billion.

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