BERLIN, Sept. 25 (Xinhua) -- Germany's economy is emerging from a prolonged slump and is expected to grow by 0.2 percent in 2025, according to a report released Thursday, which warned that U.S. tariff policy remains a major downside risk.
After two consecutive years of recession and further stagnation in the first half of this year, five leading economic institutes, including ifo and the German Institute for Economic Research (DIW Berlin), said the downturn appears to have bottomed out.
The joint forecast indicates that domestic demand is strengthening, with robust services growth providing the main impetus. However, manufacturing remains weak, constrained by high energy and labor costs, a shortage of skilled workers, and declining competitiveness. Without structural reforms, these factors will continue to weigh on prospects.
Exports, historically a key engine of Germany's economy, are unlikely to drive the current recovery. The report noted that U.S. tariff hikes have dampened global trade and weakened foreign demand for German goods.
Instead, growth over the next two years is expected to depend largely on expansionary fiscal measures. Since taking office, the new federal government has relaxed debt-brake rules to enable major infrastructure and defense investments and plans to significantly increase borrowing in the 2026 budget to stimulate domestic demand.
"The German economy will recover noticeably in the next two years," said Geraldine Dany-Knedlik, head of forecasting and economic policy at DIW Berlin. But she cautioned that the momentum is fragile, warning that "the German economy is still on shaky ground."
The institutes forecast GDP growth of 1.3 percent in 2026 and 1.4 percent in 2027, but highlighted "considerable risks," particularly from trade tensions between the United States and the European Union (EU).
"Should conflicts arise in the implementation of commitments, there is a risk of renewed escalation with considerable burdens for both economic areas," the ifo Institute stated.
In their April spring forecast, the institutes had already slashed the 2025 growth outlook to 0.1 percent from 0.8 percent, citing U.S. tariffs on autos, steel, and aluminum announced at that time.
The U.S. government announced on Wednesday that it would formally implement the trade agreement with the EU and lower tariffs on imports of cars and car parts from the EU to 15 percent, retroactive to Aug. 1.
While welcoming the move as "an important step," Hildegard Mueller, president of the German Association of the Automotive Industry, cautioned that the current U.S. tariffs of 15 percent on cars and car parts and 25 percent on commercial vehicles "continue to pose a significant challenge for the German automotive industry." ■