German economy expected to grow by only 0.1% next year, IW

BERLIN (Reuters) - The German economy will grow by only 0.1% next year, following two consecutive years of contraction, according to the forecasts of the German Economic Institute IW, seen exclusively by Reuters on Thursday.

The stability in the service sector is just enough to compensate for the continued declines in the industrial and construction sectors, according to IW, an economic institute close to employers.

"This is no longer just a cyclical downturn, but a severe structural crisis," IW chief economist Michael Groemling said.

The economy is expected to contract this year by 0.2%, according to IW forecasts, well below the 0.8% expected in the euro zone.

The ongoing economic weakness is meanwhile increasingly affecting the labor market. For 2025, the experts forecast the unemployment rate will rise to 6.2% from 6.0% expected in 2024.

The collapse of Germany's ruling coalition is set to bring more economic pain in the months ahead. The governmental vacuum in Germany paralyzes and unsettles, IW said in its report.

"The upcoming government must not lose any time in making Germany competitive again," Groemling said. "This includes a corporate tax reform, incentives for an expansion of working hours, investments in infrastructure and defense, and a serious reduction of unnecessary bureaucracy."

Industry continues to suffer from geopolitical conflicts, and the situation is not expected to improve, the institute said. Donald Trump's victory in the U.S. presidential election raises the spectre of a tit-for-tat trade war with Germany's main trading partner.

From 2025 to 2028, there would be a total loss of economic output in Germany of the order of 180 billion euros, according to IW. This is explained by export losses, but above all by further declining investments in Germany, the institute said.

(Reporting by Klaus Lauer, writing by Maria Martinez; Editing by Chizu Nomiyama)