GERMANY –   Germany’s economy will stagnate in 2025, with only a modest recovery of around 1% projected for 2026, according to the latest economic forecast from the German Economic Institute (IW). High energy and labor costs, excessive regulation, geopolitical uncertainties, and protectionist trends continue to weigh heavily on the country.

Exports under pressure: Despite a customs agreement with Donald Trump, Germany remains particularly affected by the unpredictability of U.S. trade policy. Exports are expected to fall by about 0.5% in 2025 and will likely see only a slight rebound in 2026. A return to pre-crisis conditions is not in sight.

Investment slowdown: Global uncertainty and a backlog of domestic reforms are sharply curbing investment. In the first half of 2025, gross fixed capital formation fell by 1.7% year-on-year, and remains about 11% below 2019 levels. Equipment investment is set to drop 2.5% this year, a critical setback for long-term growth potential.

Construction slump: The construction sector remains weak, with investment falling another 1.7% in 2025, particularly in residential building. State investment measures will not show positive effects until 2026.

Weak consumption and labor market strain: Private consumption is expected to grow by only 1% in 2025 as households cut spending amid fears of job losses. Employment stagnates at around 46 million, while unemployment remains elevated.

Reforms such as adjustments to citizens’ benefits will not have an impact before 2026.

Call for reforms: The anticipated positive impact of special infrastructure funds has yet to materialize. “If the government sets the right course with reforms this autumn, the economy could begin to recover in 2026,” said IW chief economist Michael Grömling. He emphasized the urgent need for corporate tax reform, significant cuts to bureaucracy, and targeted investment incentives.