Germany to return to growth after two years of contraction, economists predict

By Maria Martinez

BERLIN (Reuters) -The German economy is expected to grow this year following two consecutive years of contraction, four economic institutes said on Thursday, raising their forecasts for 2025 and 2026.

The Kiel Institute for the World Economy (IfW) raised its forecast to 0.3% growth from the stagnation it had previously envisaged due to a better-than-expected first quarter, when the economy grew by 0.4%.

"The German economy is seeing some light at the end of the tunnel," the economists said in their new forecasts.

They are also more optimistic about next year, raising the forecast for Europe's largest economy to 1.6% growth from 1.5% previously.

The Leibniz Institute for Economic Research (RWI) said it expects 0.3% growth this year and 1.5% in 2026. The Ifo institute meanwhile predicts growth of 0.3% this year, up from the 0.2% previously forecast, and 1.5% in 2026, up from 0.8% previously.

The Halle Institute for Economic Research (IWH) in its summer forecast said the economy is likely to grow by 0.4% this year, up from predicted growth of 0.1% previously, and by 1.1% in 2026.

"The crisis in the German economy reached its low point in the winter half-year," said Timo Wollmershaeuser, head of forecasts at Ifo. "One reason for the growth spurt is the fiscal measures announced by the new German government."

The German cabinet approved a 46 billion euro ($52.94 billion) tax relief package last week to support companies and revive its sluggish economy from this year through 2029.

Germany's parliament also approved plans for a massive spending surge in March, including a 500 billion euro infrastructure fund and largely removing defence investment from the rules that cap borrowing.

The German government needs structural reforms to bring the economy back to growth, the Organization for Economic Cooperation and Development (OECD) said on Thursday in its report on Germany, which includes its forecasts of growth of 0.4% this year and 1.2% in 2026 published last week.

Growth will be driven by investments and consumption, while exports will remain a hurdle, the OECD said in its report. A decline of 0.3% in exports is expected in 2025, followed by a small increase of 0.6% in 2026.

In its economic forecast, the Ifo institute estimates a boost from the German government's measures of 10 billion euros in 2025 and 57 billion euros in 2026. Growth is likely to be 0.1 percentage points higher this year and 0.7 percentage points higher next year than in a scenario without the plans.

The U.S. tariff offensive will cut economic growth by 0.1 percentage points in 2025 and 0.3 percentage points in 2026, taking into account the tariffs already imposed.

If an agreement is reached in the trade conflict, growth in Germany could be greater, while an escalation could lead to a renewed recession, Ifo said.

Oliver Holtemoeller, head of the macroeconomics department at IWH, said a possible escalation of U.S. trade conflicts is a significant risk for the German economy.

"The economic antagonism between the U.S. and China demands a special balancing act from the German industry, as it is closely linked with producers in both economic areas," Holtemoeller said.

Ifo said the inflation rate will be 2.1% in 2025 and 2.0% in 2026, at the European Central Bank's target, while the labour market is expected to stabilize. It forecast the unemployment rate will rise to 6.3% in 2025 before falling to 6.1% in 2026.

(Reporting by Maria Martinez and Rene Wagner; Editing by Madeline Chambers, Friederike Heine and Jan Harvey)