German Economy to Flatline in 2025 As Tariff Turmoil Hits, Government Says

Glendon

Summary:

The German government cut its economic growth forecast on Thursday and now sees stagnation in 2025 instead of a 0.3% expansion as uncertainty from global trade disputes is set to hobble growth and dampen investment.

Germany was the only G7 economy that failed to grow for the last two years, and the tariffs announced by U.S. President Donald Trump could put Europe's largest economy on track for a third year without growth for the first time in history.

Germany's export-driven economy was already struggling with weak global demand for its products and foreign companies chipping away at its competitiveness.

While announcing the figures, which were reported by Reuters on Tuesday, Economy Minister Robert Habeck called for the European Union and the U.S. to find a solution on trade but also for the EU to prepare countermeasures if needed.

"Now the German economy is once again facing major challenges due to the unpredictable trade policy of the United States," Habeck said in a written statement.

"Given the German economy's close integration into global supply chains and our high level of foreign trade openness, the new US protectionism could have significant direct and indirect effects on our economic growth," he said.

For 2026, the government now expects growth of 1%, down slightly from its January forecast of 1.1%, expecting some uptick under the incoming government of chancellor-in-waiting Friedrich Merz.

Exports are expected to fall by 2.2% this year, following a 1.1% decline in 2024. Next year, exports are expected to rise by 1.3%.

Earlier this month, German economic institutes cut their growth forecast for this year to 0.1% from the 0.8% expected in September, taking into consideration initial U.S. tariffs on steel, aluminium and cars.

However, a survey on Thursday showed German business morale unexpectedly improving in April, though expectations were still slightly gloomieras companies remain uncertain about how the tariff escalation with the United States will play out.

The German government foresees inflation falling to 2% this year and then to 1.9% next year, down from 2.2% last year.

Economic weakness will take its toll on the labour market, with the unemployment rate expected to go up to 6.3% this year from 6.0% last year, before falling to 6.2% in 2026.

Source: Reuters

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