The Munich-basqed ifo Institute said “reliable economic policy decisions” are needed to resolve ongoing uncertainty about the direction of the economy, which it argued “has been holding back investors and consumers for years.”
A deep rift over Germany’s economic malaise has brought down Chancellor Olaf Scholz’s three-party coalition, with fresh elections expected in February.
“At the moment, it is not yet clear whether the current phase of stagnation is a temporary weakness or one that is permanent,” ifo economist Timo Wollmershäuser said, warning that growth could level out at 0.4% in 2025 if necessary policies are not passed.
The assessment was echoed by the Kiel Institute for the World Economy (IfW), which forecast GDP to shrink by 0.2% this year and remain flat in 2025.
“The German economy is struggling with decreasing competitiveness mirrored by the sluggish overall economic performance, which hardly allows for any upward forces,” said IfW researcher Stefan Kooths.
The IfW said that the worsening crisis in German industry, coupled with expected tariffs following Donald Trump’s victory in the US presidential election, were responsible for the revised forecast.
Institutes forecast stagnation
Other top institutes across Germany had similar outlooks on Thursday, which also saw the European Central Bank cut interest rates in the eurozone by a quarter point to 3%.
The Berlin-based German Institute for Economic Research (DIW) forecast German GDP to shrink by 0.2% this year and rise only 0.2% in 2025.
The Leibnitz Institute for Economic Research (RWI), based in Essen, also predicted a 0.2% fall for 2024 but was slightly more hopeful for next year, forecasting growth of 0.6%.
In between, the Halle Institute for Economic Research(IWF) saw GDP in 2025 rising 0.4% after a 0.2% drop in the current year.
Unemployment to rise
The institutes highlighted that another year of disappointing growth in Germany could impact the unemployment rate.
“The recession has now also reached the labour market, with the unemployment rate likely to rise to 6.3%,” ifo said, up from 6% in the current year.
Many of Germany’s largest companies have warned in recent months that they could be forced to cut jobs, with the key automotive sector at particular risk.
Structural issues
Ifo said German businesses are struggling due to a lack of demand, as consumers continue to suffer from a loss of purchasing power following a period of high inflation, with wages failing to keep up.
Meanwhile, orders from abroad have also fallen, despite a general economic recovery across the world.
If German policymakers fail to act, the institute warned, there is a risk of “creeping deindustrialization” in which German companies relocate production and investment abroad.
However, the next German government has options to encourage growth, ifo said, including policies such as “a lower tax burden on companies as well as falling bureaucracy and energy costs, expansion of the digital, energy and transportation infrastructure and an increase in the supply of labour,” the institute added.
February’s early election could also help to provide a clearer direction for the country’s economy, the IfW said. The parliamentary polls were originally scheduled for September.
“The period of high economic and political uncertainty could be shortened by more than half a year,” the IfW added.