Bundesbank Anticipates German Economy to Constrict This Year, With a Tepid Recovery Expected in 2025

Forex - Bundesbank President Joachim Nagel stated that the German economy will shrink for the second consecutive year this year, and that the recovery will be sluggish, potentially worsened by the trade war with the United States. It is thought that the German economy will stagnate during the winter months, with an anticipated increase in private consumption expected to be lower than forecasted, a further weakening of the labor market, and business investment recovering only slowly.

Nagel emphasized, "The German economy is grappling not only with persistent economic headwinds but also with structural issues." He noted that "the labor market is significantly reacting to the prolonged weakness in economic activity."

The Bundesbank forecasts that the German economy will contract by 0.2% this year, while it downgraded its growth outlook for 2025 from 1.1% to 0.2%. However, considering the threats from rising protectionism, geopolitical conflicts, and the impact of structural change on the German economy, the bank warned that these figures might be overly optimistic.

The Bundesbank added that simulations related to the Trump administration's tariff increases indicated that the United States would experience the largest growth impact, but Germany would also lose between 1.3% and 1.4% of its GDP by 2027. While the Bundesbank projected that inflation would rise by only 0.1% to 0.2% annually until 2027 due to Trump's protectionism, the National Institute of Global Econometric Modeling anticipates an increase of 1.5% next year and 0.6% in 2026.

"Currently, the risks to economic growth are skewed to the downside, while the risks to inflation are skewed to the upside," the Bundesbank stated, adding that upcoming federal elections could also alter the fiscal outlook.