ifo Economic Forecast Summer 2025: Recovery Is Getting Closer – Economic Policy Uncertainty Remains High

German Economy

Numerous indicators suggest that the crisis in the German economy reached its low point in the winter half-year 2024/2025. Private consumption has been developing positively for four quarters, and the trend is accelerating. The gains in purchasing power resulting from the increase in real incomes are increasingly being spent and no longer saved.

It will not be possible to maintain the momentum from the first quarter of 2025 over the rest of the year. Stagnation is expected in the second quarter, as there was a noticeable decline in industrial production and exports in April due to the pull-forward effects. However, the outlook remains cautiously positive thanks to the improved order situation and optimistic sentiment indicators. The increasing optimism is probably also due to hopes for a reboot of economic policy with the new German government and progress in the trade conflict with the US.

The forecast assumes that there will be no further changes to US trade policy. Nevertheless, the tariff increases on EU imports that have already come into force are weighing on export business. According to model calculations, they will dampen German GDP growth by 0.1 percentage points in 2025 and by 0.3 percentage points in 2026.

The new German government is also expected to expand infrastructure and defense spending and implement the measures announced in the coalition agreement. These include tax incentives such as accelerated depreciation, a reduction in VAT in the hospitality sector, electricity tax, and grid fees, as well as a higher commuter allowance. Taken together, fiscal policy is likely to deliver only a minor boost in 2025 (EUR 10 billion) and a significantly greater boost in 2026 (EUR 57 billion).

As a result, government consumption and investment expenditure as well as corporate investment are likely to increase noticeably, particularly in the coming year. Average quarterly GDP growth will increase to 0.4 percent in 2026, meaning that the underutilization of overall economic capacity will gradually decrease and the German economy will enter a recovery phase.

Overall, price-adjusted gross domestic product will rise by 0.3 percent in 2025 and by 1.5 percent in 2026. Compared to the spring 2025 forecast, the growth rates have thus been raised by 0.1 and 0.7 percentage points respectively. The revision is mainly due to the additional fiscal stimuli, which will increase real GDP by around EUR 25 billion in 2026.

Price Development

The forecast for core inflation (increase in consumer prices excluding energy) was raised slightly compared to the spring to 2.6 percent (+0.1 percentage points) in 2025 and to 2.3 percent (+0.2 percentage points) in 2026. Nevertheless, the forecast for headline inflation for 2025 was lowered by 0.2 percentage points to 2.1 percent, primarily due to lower energy prices and the reduction in electricity tax and grid fees. These measures will reduce consumer prices by 0.15 percentage points in both 2025 and 2026. Inflation is likely to remain unchanged at 2.0 percent in 2026.

Fiscal Policy

Despite additional stimulus, fiscal policy will remain slightly restrictive in 2025 – mainly due to the discontinuation of inflation compensation bonuses and higher social security contributions. The general government financing deficit will fall from 2.7 percent of GDP in 2024 to 2.3 percent in the current year. It is expected to rise to 3.4 percent in 2026 due to expansionary measures. The gross debt will increase accordingly from 62.5 percent to 64 percent of GDP.

Labor Market

There are also initial positive signs on the labor market. A slight upturn in employment is expected in the coming months in line with the gradual recovery. However, a strong acceleration in employment growth will remain limited due to demographic trends – the number of people of working age will fall from 2025.

After a decline of 26,000 in 2025, the number of people in employment will increase by around 121,000 in 2026. Registered unemployment is expected to rise by 161,000 in 2025 and then fall by 63,000 in 2026. The unemployment rate in 2025 and 2026 will therefore be 6.3 percent and 6.1 percent respectively.

Eurozone and Global Economy

In the eurozone, the economy showed a slight upward trend at the start of the year, driven primarily by exports to the US being brought forward. Consumer demand remained subdued, despite favorable conditions with low inflation, rising real incomes, and low unemployment. The European Central Bank lowered its key interest rates significantly. The threat of high US tariffs on EU goods is creating greater economic uncertainty and is likely to slow down investment. Overall, economic production is likely to grow only moderately by 1 percent in both 2024 and 2025.

US trade policy experienced strong fluctuations in the spring. The introduction of tariffs of up to 145 percent in the conflict with China was followed by temporary suspensions and partial reductions. The US economy has been robust so far, but consumer spending slowed at the start of 2025. Despite rising real incomes, the savings rate increased noticeably. Production fell slightly, mainly due to a sharp increase in imports. Inflation will probably increase in the short term as a consequence of the tariffs but then ease again as a result of the fall in crude oil prices and a weaker economy. Accordingly, the US Federal Reserve is likely to cut interest rates further from the end of 2025. All in all, the US economy will probably slow noticeably in the forecast period but not fall into recession. Economic growth is expected to be around 1.4 percent in 2024 and around 1.7 percent in 2025.

In China, the trade conflict with the US led to high tariffs, but they have recently been reduced again. China’s pace of expansion is likely to weaken somewhat in the summer half-year, mainly due to the strong inventory buildup at the start of the year and weak consumer demand. Economic growth will probably decline from 4.2 percent this year to 3.9 percent next year.

The global economy will slow down as a result of the trade conflict, and global economic output will only grow by around 2.0 percent and 2.1 percent in 2024 and 2025 respectively. Global trade in particular is showing signs of weakness, and it will even shrink by 0.3 percent in the coming year.

Key Forecast Figures for Germany

Source: Federal Statistical Office; Federal Employment Agency; Deutsche Bundesbank; 2025 to 2026: forecast by the ifo Institute.        

© ifo Institute June 2025

Risks for the Forecast

•    Trade and economic policy of the current US administration
•    Stance of German fiscal policy