Germany’s leading economic institutes expect the country to return to growth after a weak start to 2025, though they caution that structural weaknesses continue to weigh heavily on long-term prospects.

According to the Joint Economic Forecast released this week, gross domestic product is expected to expand by just 0.2 percent in 2025, following stagnation in the first half of the year. Growth is projected to accelerate to 1.3 percent in 2026 and 1.4 percent in 2027, largely due to government stimulus measures. The estimates are broadly unchanged from the spring forecast.

The forecast is prepared twice a year by a consortium of institutions, including the ifo Institute in Munich, the German Institute for Economic Research (DIW Berlin), the Kiel Institute for the World Economy, the Halle Institute for Economic Research (IWH), and RWI Essen, working with Austria’s WIFO and the Institute for Advanced Studies in Vienna.

The government’s looser borrowing rules have created room for higher spending on defense, infrastructure and climate-related investments. Analysts note that these measures will support demand, though the effect will be limited by slow disbursement of funds and lengthy planning processes. The institutes also warn that some of the new borrowing simply postpones fiscal consolidation, creating a sizeable adjustment need by 2027.

Despite the near-term boost, the report highlights persistent structural challenges. High energy costs, rising labor expenses, shortages of skilled workers, and weakening international competitiveness continue to erode Germany’s growth potential. Export demand is expected to remain subdued, reflecting both higher trade barriers and waning foreign appetite for German goods.

As a result, the recovery is projected to be driven mainly by domestic demand. Public services and consumer-oriented sectors should expand, supported by rising employment and real disposable incomes. Inflation is forecast to hover slightly above two percent over the period. Manufacturing, by contrast, is only expected to see modest gains.

Risks to the outlook remain considerable. The institutes point to the ongoing trade dispute between the European Union and the United States as a key source of uncertainty. They also stress that the eventual impact of expansionary fiscal policy depends on how effectively funds are channelled into projects.

The consortium concludes that Germany is at a turning point. While fiscal policy can lift output in the short run, the lack of structural reforms leaves the country vulnerable to slower potential growth in the longer term. The report calls for a coordinated reform agenda to strengthen competitiveness, improve labor market conditions, and restore confidence in the country’s economic model.

Source: DIW Berlin

Narratives about who bears the costs of climate policy play a significant role in shaping political attitudes, according to a new study by the German Institute for Economic Research (DIW Berlin). The research suggests that when climate policy is framed as unfairly burdening households, letting companies shirk responsibility, or weakening the German economy, it can amplify climate populist attitudes and reduce trust in democratic institutions.

The study, conducted by DIW Berlin’s Socio-Economic Panel (SOEP) in cooperation with the NGO FiscalFuture, involved a survey experiment with around 1,600 participants. Researchers tested three types of narratives: that climate policy disproportionately affects poorer households, that companies avoid paying their share, and that environmental measures undermine Germany’s economy. All three narratives increased climate populist sentiment, while the income-related framing had the added effect of lowering satisfaction with democracy.

“Political debates are not based solely on facts – simplistic narratives have great power, especially when they are striking and easy to remember,” said Lorenz Meister, a doctoral researcher at SOEP and co-author of the study. He noted that narratives focusing on distribution issues are particularly influential.

The survey found that responses varied across social and political groups. Low-income households, women, East German residents, and right-leaning voters were most sensitive to the income narrative. The corporate narrative resonated more strongly with men, left-leaning voters, and respondents in eastern regions. The economic narrative, which portrays climate action as harmful to growth, had its strongest impact on right-wing voters.

The authors define “climate populism” as rhetoric claiming that climate policy is a project of elites pursued at the expense of ordinary people. Populist parties in Germany and elsewhere have increasingly used this framing to mobilise support.

The study emphasises that the way climate policy is designed and communicated can counteract these effects. Policies seen as socially balanced—such as direct climate payments to households—help reduce the appeal of populist narratives. Transparent communication that openly addresses distributional conflicts is also crucial.

“Climate policy must be embedded in social policy and take concerns seriously. This is the only way to effectively counter climate populism,” said Matilda Gettins of FiscalFuture, who co-authored the study.

Source: DIW Berlin