German economists predict third year of recession due to US tariffs

Yahoo

13-05-2025

Germany's economy is set to contract by 0.2% this year and slip into recesssion for a third consecutive year, according to a new forecast by the Cologne-based German Economic Institute (IW).
The country is particularly affected by the ongoing trade conflict triggered by the US government's tariffs, the IW noted.
Global uncertainties that are discouraging businesses from making investments are contributing to the downturn, with declines in major purchases such as new machinery and vehicles, it said.
High operating costs in Germany further complicate the situation, according to the IW.
Germany has seen two consecutive years of recession, with gross domestic product (GDP) having shrunk by 0.2% in 2024.
Expectations slightly improved
Meanwhile, economic expectations among German financial experts were much more optimistic in May than initially predicted, according to another survey.
The Centre for European Economic Research (ZEW)'s economic sentiment index rose by 39.2 points compared to the previous month to +25.2 points. Economists had expected a significantly lower increase on average.
"The formation of the new German government, the movement in the customs disputes and a stabilizing inflation rate are contributing to the increased optimism," said ZEW President Achim Wambach.
On the other hand, the already very negative assessment of Germany's current economic situation slightly deteriorated again, with the corresponding value dropping by 0.8 points to -82 points.
Economists had expected an improvement to -77 points.
US trade policy biggest risk
US trade policy poses the biggest risk to the global economy this year, according to the IW.
Without the US tariff policy, global economic output in 2025 could be up to 0.8% higher, the institute said.
The outlook for both Germany's industrial and construction sectors remains grim. Industrial companies are expected to generate less added value this year, following a 3% decline in 2024.
High energy prices, rising wages and increasing regulation are placing additional pressure on businesses.
After a 3.7% drop in 2024, construction companies are facing further constraints this year, with high construction costs driven by regulation continuing to hinder the sector.
The IW has also observed that these trends are now affecting the labour market, with the number of people employed declining since mid-2024. By the summer, the number of unemployed people could reach 3 million, a level not seen since 2010, the economists said.
Michael Grömling, head of macroeconomic research at the IW, said Germany's new government now has the opportunity to reverse the trend, pointing at the country's planned special infrastructure fund that could help stimulate the economy.