14-03-2025
'Erratic' US policies likely to hit German growth
The DIW economic institute downgraded its forecast for Europe's biggest economy from a previous estimate of 0.2 percent expansion made in December.
For 2026, it now expects growth of 1.1 percent, down from 1.2 percent previously.
Firms were faced with uncertainty in the face of "erratic" US trade policy and potential counter-measures, the German institute warned.
The effect was particularly pronounced for the many German companies that rely on exports, said Geraldine Dany-Knedlik, DIW's head of forecasting and economic policy.
Germany is heavily dependent on exports, and last year the United States overtook China to become the country's top trading partner.
US President Donald Trump, who has been threatening allies and adversaries alike with sweeping tariffs, has said he wants to hit all EU imports to the United States with hefty duties.
Weakness in key trading partners has been a reason why Germany has been mired in recession for the last two years, combined with a manufacturing slowdown and tepid consumer demand.
But signs that negotiations to form a new coalition government following February's election were making quick progress provided a bright spot for the economy and might give people some certainty, Dany-Knedlik said.
"We might soon expect a government that is capable of action, and that should quickly make economic conditions clearer," she said.
A proposal by likely next chancellor Friedrich Merz to spend €500 billion over 10 years on infrastructure could provide a major boost, potentially lifting GDP by two percent a year, DIW said.
On Friday, Merz announced that he had reached a deal with the Greens that would allow him to get his spending plans through parliament on Tuesday.
These plans were not included in the DIW's latest forecasts, however.
DIW president Marcel Fratzscher said that a more fundamental reform of strict rules limiting government debt -- known as the "debt brake" -- was also sorely needed.
"Strengthening public investment and reducing economic uncertainty should be a top priority for the new federal government," he said.
