German economy to regain momentum in the next two years, institutes say

By Maria Martinez

BERLIN (Reuters) -The German economy is emerging from a trough and is likely to regain some momentum over the next two years, five leading economic institutes said on Thursday.

The institutes nudged their 2025 growth forecast for Europe's largest economy up to 0.2%, confirming information reported by Reuters earlier this week. The institutes had predicted 0.1% growth this year and 1.3% next year in their previous April forecast.

The new government's plans to sharply increase spending on infrastructure and defence are expected to prop up growth in the longer term, but the economy will struggle for now, buffeted by the U.S. administration's global trade war.

SPENDING SPREE TO SUPPORT 2026 GROWTH 

For next year, the institutes kept their forecast of 1.3% growth, as government spending should help the economy gain momentum.

The forecasts include for the first time a prediction for 2027, when they expect the economy to expand by 1.4%.

"The German economy is still on shaky ground," said Geraldine Dany-Knedlik, from the German Institute for Economic Research DIW Berlin.

"It will recover noticeably in the next two years. However, given ongoing structural weaknesses, this momentum will not last."

German Chancellor Friedrich Merz took office in May promising to revive stagnant growth.

While it was clear that his promised rise in public spending would take time to benefit the economy, there is a growing sense that the promised reforms are slower and less far-reaching than initially expected.

The institutes said the expansion in government spending will provide stimulus in the coming years, albeit with limitations as funds for construction and defence projects are being disbursed more slowly than budgeted and loans are also being used to avoid consolidation that is actually due.

The unemployment rate is expected to rise to 6.3% next year from 6.0% in 2025, before easing to 5.6% in 2027, as the economic upturn is likely to bring about a noticeable improvement in the labour market, they said.

Together with rising real disposable incomes, this will boost private consumption and thus consumer-related services, the institutes said.

Inflation is expected at around 2.0% during the forecast period.

(Reporting by Maria Martinez, Editing by Miranda Murray and Hugh Lawson)