The German economy faces the challenge of returning to dynamic growth after years of stagnation. According to the latest forecasts from the Kiel Institute for the World Economy (IfW Kiel) and the German Institute for Economic Research (DIW Berlin), 2025 will be a transitional year for the German economy with low growth, but from 2026 onward the business cycle may accelerate. Experts emphasize the role of fiscal policy in stimulating domestic demand, though external risks, such as protectionism from the new U.S. administration, could hamper exports.
IfW Kiel projects GDP growth of 1.3 percent for 2026 and 1.2 percent for 2027. This is a slight downward revision from estimates a month ago, caused by weaker fiscal impulses. DIW Berlin, meanwhile, forecasts just 0.2 percent growth for 2025 (revised downward after a weak first half), but expects 1.7 percent in 2026 and 1.8 percent in 2027. The differences stem from their assessment of the impact of fiscal policy — DIW sees it as a stronger growth engine, driven by public investment in infrastructure, climate protection, and defense.
The reasons for low growth in the near term include stagnant private consumption and weak exports. Real household incomes rose by 1.6 percent in 2024, but this year they have barely moved. From 2026 onward, thanks to rising real wages and falling inflation, domestic demand should revive, supporting the recovery.
Inflation is stabilizing around 2 percent. IfW Kiel expects a slight increase in coming years, while DIW forecasts 2.1 percent in 2025, 2.0 percent in 2026, and 2.2 percent in 2027. This is close to the European Central Bank's target, allowing for a more accommodative monetary policy.
The labor market picture is mixed. According to IfW, the unemployment rate will fall from 6.3 percent this year to 5.8 percent in 2027, thanks to the economic recovery. DIW projects a rise to 6.3 percent in 2025 (from 6.0 percent in 2024), with 2.95 million unemployed, followed by a decline to 6.2 percent in 2026 and 5.8 percent in 2027. Growth in public sector employment, such as hiring in administration, is expected to ease the pressure.
Industry and exports, the traditional pillars of the German economy, remain in poor shape. IfW Kiel estimates export growth at 0.6 percent in 2026 and 1.3 percent in 2027, held back by competition from China and U.S. protectionism. Imports from China are rising, but exports to Asia are falling. DIW highlights structural problems in industry, where the lack of transformation is being masked by fiscal stimulants. A revival in exports is expected to come from European demand, though a strong euro and U.S. tariffs pose barriers.
Services and private consumption are becoming key drivers. Consumers, supported by rising wages and low inflation, should increase spending. Construction, after a weak period, is set to rebound from 2025 thanks to a rise in orders and building permits. Equipment investment is growing moderately, supported by tax incentives and public spending on roads, railways, and green technologies.
Both institutes agree on the need for expansionary fiscal policy. According to IfW, the budget deficit will rise from 2.0 percent of GDP this year to 3.5 percent in 2027, stimulating economic activity. DIW projects deficits of 2.4 percent of GDP in 2025 (106 billion euros), 3.2 percent in 2026 (150 billion euros), and 3.5 percent in 2027 (168 billion euros). This is the result of increased spending on infrastructure, climate, and defense, as well as incentives for private investment.
DIW suggests the need to cut subsidies, eliminate tax privileges and capital gains exemptions, and raise taxes on large passive wealth, while providing relief for middle incomes. Without structural reforms, fiscal impulses may prove to be nothing more than a "flash in the pan," failing to deliver lasting growth.
The main risks are U.S. trade policy under Donald Trump, which could weaken exports, and China's real estate crisis, which is slowing global growth (DIW forecasts: 3.7 percent in 2025, 3.3 percent in 2026). IfW highlights Chinese competition in third-country markets.
