German economy on course for recovery: A ray of hope or just an illusion?

German economy on course for recovery: A ray of hope or just an illusion?

The German economy is finally showing the first signs of recovery, which is urgently needed after two years of stagnating or even shrinking developments. In recent months, leading economic institutes have raised their growth forecasts for 2025 and 2026. The Ifo Institute expects growth of 0.3% in 2025 and 1.5% in 2026, while the IfW Kiel also expects similar growth of 0.3% in 2025, but is more optimistic at 1.6% in 2026. The IWH, on the other hand, remains more cautious with a pessimistic forecast of just 0.4% for 2025. The Anlegerplus reports that domestic demand can make a significant contribution to the recovery, thanks to increasing private consumption and corporate investment.

What is particularly notable is a change in mood among companies, as the Ifo Institute has observed. This is also reflected in the 0.4% increase in economic output in the first quarter of 2025, which is primarily due to brought forward exports to the USA. However, Clemens Fuest, President of the Ifo, warns against excessive expectations and emphasizes the need for reform in various areas. Through targeted investments and structural reforms, potential growth could even rise to up to 2.3%.

Fiscal measures and foreign trade

The new federal government is planning various fiscal measures that are intended to stimulate growth. This includes infrastructure and defense spending as well as tax relief, although national debt is expected to rise. The IfW forecasts a financing deficit of 3.5% of GDP for 2026 and a debt level of 63.9%. However, these challenges are pushed into the background because there is a risk from US trade policy, which increases uncertainty for German foreign trade.

The Bundesbank highlights that US tariffs will remain in place over the next few years remain, could reduce growth by 0.1 percentage points in 2025 and 0.3 in 2026. The effects of American trade policy should not be underestimated, as they have already been felt since Donald Trump's term in office. Although Joe Biden did not rule out a fundamental shift in trade policy, tariffs and import restrictions on many products, especially steel and aluminum, remain essential. Under the motto “Made in America,” Biden wants to strengthen the domestic industry.

A look into the future

Private consumption is currently more dynamic than expected, supported by a robust labor market and lower inflation. Fortunately, the inflation rate fell to 2.1% in May 2025. However, future economic developments depend heavily on US trade policy and fiscal realignment. GDP is forecast to stagnate in 2025, followed by slight growth of 0.7% in 2026. Wage growth will be weaker this year, but is expected to pick up again from 2026.

The German economy is therefore facing an exciting, albeit challenging, path. With the right reforms and a stable political situation, North Rhine-Westphalia can look forward to better times, even if Washington remains of great interest.