German economy: IfW Kiel lowers economic forecast

The Institute for the World Economy in Kiel has further lowered its forecast for the German economy. Gross domestic product is expected to shrink by 0.2 percent this year and stagnate next year, the IfW said. “The recession has now also reached the labor market, and the unemployment rate is likely to rise to 6.3 percent,” it said. In the current year it is 6.0 percent.

The main reasons for the downward revision are the expected US tariffs and the worsening crisis in German industry. The German economy is struggling “with massive locational weaknesses that hardly allow any upward forces,” says Stefan Kooths, head of economic activity at the IfW Kiel.

Capacity utilization is now 5 percentage points below the low points in normal recession phases. But: “With the early elections, there is a possibility that the period of high economic policy uncertainty will be shortened by more than half a year,” write the economic researchers.

Inflation rate will probably remain unchanged

The IfW expects only weak impulses from private consumption. According to the forecast, construction investments will continue to fall in 2024 and 2025. The inflation rate is expected to be 2.2 percent this year and next. “Subject to a new federal government reorienting its financial policy, the general government financing deficit in 2025 and 2026 is estimated to be around 5 and 20 billion euros higher than expected in the fall,” the institute said.