Significant Alteration in Economic Outlook by Ifo Institute Economists
German Economy on the Rise: Looking Ahead to 2026
Step aside, economic crisis—the German economy, as predicted by the Ifo Institute, is expected to bounce back by 2026, with a growth rate of 1.5%. This comeback is largely due to the new federal government's growth package, potentially adding a whopping 57 billion euros to the economy by 2026.
However, the recovery's success hinges largely on the outcome of the U.S. trade conflict. If all goes well, expect export numbers to soar, propelling growth. Conversely, if tensions escalate, the economy might face the risk of another recession.
The Shift: Hope in the New Coalition
The raised forecasts can be attributed to the high hopes of industry players that the new coalition will bring an end to the economic standstill and negotiate a resolution in the trade dispute with the U.S. Even in the first quarter of 2025, economic performance could surge by 0.4%, driven by exports to the U.S. and increased private consumption.
U.S. Policy: A Looming Shadow
Though the European trade conflict with the U.S. remains unresolved, Ifo warns of potential risks arising from U.S. trade policy. At the moment, increased U.S. import tariffs could lower German economic growth by 0.1 percentage points in 2023 and 0.3 percentage points in 2026.
Inflation and Unemployment: A Stable Picture
Though growth is set to return, the institute does not anticipate a renewed increase in the inflation rate. The projected inflation rate for 2023 is 2.1%, with a slight dip to 2.0% in 2026. Similarly, the unemployment rate is projected to decrease slightly in 2026 from the current rate of 6.3%.
Other Forecasters Agree: 2026 Recovery
The Kiel Institute for the World Economy has also revised its growth forecast for 2026, predicting a slightly stronger economy at 1.6%. The Halle Institute for Economic Research anticipates a more moderate acceleration, with GDP growth of 1.1% in 2026. Both the OECD and Bundesbank expect a slightly slower recovery for 2026, with the OECD projecting growth of 1.2% and the Bundesbank expecting 0.7% in 2026 and 1.2% in 2027.
In summary, the German economy is showing promising signs of recovery after a challenging few years, with most forecasts projecting a return to growth in 2026. Economic growth hinges on the resolution of ongoing trade tensions and the positive impact of government stimulus measures.
The success of Germany's expected economic recovery in 2026 is significantly linked to the resolution of ongoing trade tensions with the U.S., as any escalation could pose a risk to growth. In spite of this positive outlook, inflation rate is projected to remain stable with a rate of 2.0% in 2026, while finance experts anticipate the unemployment rate to slightly decrease in the same year.
