Hopes for German economic recovery vanish as election nears

By Christian Kraemer and Maria Martinez

BERLIN (Reuters) -Germany's long-awaited economic recovery has been postponed once again, as the government cut its forecasts for this year amid trade tensions and growing domestic uncertainty over the upcoming election.

The annual government report presented on Wednesday said the economy - still Europe's largest - is expected to grow by 0.3% this year, down from a previously forecast 1.1% and showing little sign of recovery from two years of contraction.

The dispute over how to revive Germany's ailing economy contributed to the collapse of the government in November, setting the stage for snap elections on Feb. 23.

"Germany is stuck in stagnation," Economy Minister Robert Habeck said on Wednesday. "We see that the growth that we have been expecting for so long is also delayed this year."

In 2026, the recovery should arrive with growth of 1.1%, according to the government.

Habeck gave three reasons for the sharp cut in the government's forecasts for 2025: a growth initiative that could not be implemented due to the collapse of the ruling coalition, uncertainty surrounding the snap election, and geopolitical risks, particularly linked to U.S. President Donald Trump's re-election.

The vice-chair of the opposition conservatives CDU, Jens Spahn, told Reuters that Habeck had become the face of the economic crisis.

"Even the mini-growth forecast is too optimistic. We are heading for the third year of recession in a row, while all other industrialized nations are growing," Spahn said.

Leading associations of the German economy criticized the government, saying in a joint statement it had misjudged the situation, with Chancellor Olaf Scholz long speaking of just cyclical challenges instead of structural problems.

"Central reforms have been repeatedly postponed by politicians over the years," the associations said.

Hundreds of representatives of family businesses protested on Wednesday about the poor economic situation at the Brandenburg Gate in Berlin.

Among other things, the protesters called for a reduction in bureaucracy, lower energy prices, more skilled workers and lower taxes.

"For many family entrepreneurs, Germany is now such a bad place to do business that they invest little or not at all," said Marie-Christine Ostermann, head of the Association of Family Entrepreneur.

The economy minister blamed underinvestement, noting that Germany has had a more restrictive fiscal policy than other G7 countries, curbing growth.

"Germany has been systematically underinvesting," Habeck said, calling for a reform of the debt brake, which limits public borrowing to 0.35% of gross domestic product.

Inflation is seen at 2.2% in 2025 and falling below the European Central Bank's target of 2% in 2026, the minister said.

Unemployment is to rise to 6.3% from last year's 6.0%.

A BLOW TO TRADE

German exports are expected to decline by 0.3% in 2025 due to weakening competitiveness as well as growing geopolitical and trade tensions, the government's report said.

On Tuesday, Germany's BDI industry association said Trump's return to the White House and his tariff threats could cause the export-oriented German economy to shrink by almost 0.5% in 2025.

Habeck said tariffs have to be avoided at all costs, as they take a toll on investment and make goods more expensive.

"This is threatening for an export nation like Germany, but it is overall to the detriment of the people in all economic areas," he said.

In the 147-page report, the German government emphasized that the EU Commission, which is responsible for European trade policy, must make rapid progress in concluding further trade agreements.

"The close and intensive trade relations with the U.S. must be maintained and, if possible, strategically expanded," the report said.

(Reporting by Christian Kraemer and Maria Martinez, Writing by Rachel More, Editing by Miranda Murray and Toby Chopra)