The German economy is in danger of losing more and more trust in politics. Despite significantly better growth expectations, the leading economic research institutes are therefore concerned about the future. “The German economy has been on the upswing since the end of last year,” says Oliver Holtemöller, head of economic development at the Leibniz Institute for Economic Research Halle (IWH). But this upswing stands “on a narrow foundation”.
What the institutes expect for this year
For the current year, the leading economic research institutes expect an increase in gross domestic product (GDP) of 1.3 percent. In their spring report they had still expected 0.6 percent. The joint diagnosis is prepared by the German Institute for Economic Research, the Ifo Institute, the Kiel Institute for the World Economy, the Leibniz Institute for Economic Research Halle and the RWI - Leibniz Institute for Economic Research Essen.
At that time, the Iran war and the sharp rise in energy prices had significantly dampened expectations: an “energy price shock” was expected. However, this was lower than feared. The global economy is developing “astonishingly robust,” says economist Holtemöller.
The German export industry in particular benefits from this. In addition, there is the boom in artificial intelligence (AI) and the federal government's debt-financed spending on infrastructure and defense, which is stimulating the economy.
Although the recovery has lost some momentum in recent weeks due to low water levels and high energy prices, this is only “a short dip,” says Holtemöller.
How the institutes look to the next few years
The institutes are also revising their expectations for the coming year upwards. Private consumption is likely to pick up, as is housing construction, they say. They therefore expect GDP growth of 1.1 percent for 2027.
However, the view beyond that is much more cautious. The institutes are only forecasting growth of 0.4 percent for 2028. The main reasons behind this are the structural problems of the German economy. Companies are likely to increasingly reach capacity limits while the labor supply shrinks. Added to this are high energy prices and rising social security contributions.
Hurdles to recovery
Unlike previous economic upswings, private consumption and business investment are lagging behind developments. “Despite increasing production, there is still skepticism among many companies and private households,” says Holtemöller. High energy costs, rising social security contributions, a shortage of skilled workers, bureaucracy and increasing international competition put a strain on the location.
Above all, there is a lack of trust, warn the institutes. The mood in the German economy improved to its highest level in more than three years in the Ifo business climate index. But the researchers still say: “The mood is worse than the situation.” Anyone who believes in the upswing again will invest more again.
Stefan Kooths, who heads the forecasting center at the Kiel Institute for the World Economy, urges politicians to be reliable in the upcoming reforms: take a course and then stick to it, "so that all economic actors can adapt to it." If instead reform packages were announced on a quarterly basis, but then rolled up and postponed again, this would cause investors to hesitate.
What the economists advise the federal government
The institutes certainly see opportunities to improve the growth prospects. Holtemöller referred to a catalog of reforms presented months ago. The proposals include, among other things, a limit on social security contributions and stronger work incentives for older people. When it comes to the energy transition, the institutes are relying more heavily on price signals and are advocating for national solo efforts to be avoided when it comes to climate protection.
Further suggestions concern the digitalization of administration and the federal budget. In view of the foreseeable financing gaps, the institutes speak out against tax increases and instead in favor of cuts in government spending.
The trade warns: “Anyone who now believes that the reform work has been completed with the first better economic data is doing window dressing.” The structural burdens, especially for medium-sized companies, are still far too great.
Criticism of the fuel discount
According to experts, the state should not currently take on any more debt-financed money. The rising deficit is already worrying them.
“The state is doing more than enough to stimulate,” says Kooths. The increases that have been observed since 2019 come almost exclusively from state-run economic sectors. DIW economics director Geraldine Dany-Knedlik also emphasized that the special fund for infrastructure and climate neutrality and the credit options for defense provided significant impetus.
The experts still see a need for action: Kooths calls for “a policy that also enables the private sector to become more dynamic again”. As soon as the political framework conditions become clearer again, there will also be more stimulating forces from the economy. “The economy is not a billiard ball that only moves when it is pushed from outside.”
Dany-Knedlik warns that investments from the special fund must now start quickly and in the right places. The institutes, however, are skeptical about the fuel rebate planned by the federal government. It is a relief with a watering can, for which there is no financial policy leeway.
How others assess the trend
Other economic experts had also recently increased their forecasts for the German economy. The Organization for Economic Cooperation and Development (OECD) expects growth of 1.1 percent this year. And the BDI industry association expects an increase of one percent. Chancellor Friedrich Merz (CDU) also sees signs of recovery. “We are out of this valley of a shrinking or stagnating economy,” he said last week. But that doesn't make reforms superfluous.
