German think tanks slash 2025 growth forecast amid US-EU trade tensions

ISTANBUL

Germany’s five leading economic think tanks have sharply downgraded the country’s 2025 GDP growth forecast to just 0.1%, down from an earlier estimate of 0.8%, citing escalating trade tensions with the United States and domestic political uncertainty.

The revised forecast comes in response to U.S. President Donald Trump’s first wave of tariffs this year targeting EU steel, aluminum, and automobiles, which analysts warn could spark a broader trade war.

“The German economy is still in crisis, characterized by significant domestic and foreign policy changes at the start of 2025,” a joint report said. “Economic policy uncertainty in Germany is high, particularly due to the change of government. The protectionist trade policy of the United States is also weighing on the German economy.”

The report was compiled by five of Germany’s top economic institutes: the Ifo Institute in Munich, Kiel Institute for the World Economy (IfW), Halle Institute for Economic Research (IWH), RWI Leibniz Institute for Economic Research, and the German Institute for Economic Research (DIW Berlin).

Unemployment, inflation outlook

The report projects that the number of employed people will decline from 46.082 million to 46.019 million in 2025, while the unemployment rate is expected to rise from 6% to 6.3%.

Unemployment is forecast to reach 2.952 million people this year, before declining slightly in 2026.

Annual inflation in Germany is expected to hold steady at 2.2% in 2025 and slightly decrease to 2.1% in 2026.

Economic risks and global tensions

The think tanks warned that Washington’s trade measures pose “considerable risks for economic development in Germany,” emphasizing that further tariff hikes could exacerbate the downturn.

“The announced tariff increases indicate a possible escalation, the negative impact of which on both economic areas could be greater than assumed in the current forecast,” the report said.

However, it noted that ongoing negotiations between the EU and the US could offer a path toward resolving the growing transatlantic dispute.

Second year of contraction

Germany’s economy contracted by 0.2% in 2024, following a 0.3% decline in 2023, marking two consecutive years of economic shrinkage. Structural challenges and intensifying competition with China have also dampened the country's economic performance.