Joint Economic Forecast 1/2025
Geopolitical turn intensifies crisis – structural reforms even more urgent
‘The geopolitical tensions and the protectionist trade policy of the USA are exacerbating the already tense economic situation in Germany,’ said Torsten Schmidt, Head of Economic Research at the RWI – Leibniz Institute for Economic Research. ‘In addition, German companies are facing increased international competition — especially from China. Last but not least, structural weaknesses such as the shortage of skilled labour and high bureaucratic hurdles are weighing on growth.’
The Bundestag and Bundesrat have amended the financial constitution to create additional scope for public debt — for defence, climate protection and infrastructure. However, it is unclear how the government's increased spending scope will be utilised. The institutes expect that hardly any additional funds will be called up for defence and investments this year. However, consolidation steps that would have been necessary without the change in the financial constitution will probably not be taken. For the coming year, the institutes expect additional expenditure of around 24 billion euros combined with an expansion impulse of around 0.5 percentage points for the gross domestic product. Smaller economic sectors are more likely to benefit from additional spending on defence and infrastructure. As these are already running at near full capacity, prices could continue to rise there.
The US tariffs on aluminium, steel and vehicle imports are likely to reduce GDP growth this year and next year by 0.1 percentage points each. The additional tariffs announced on 2nd April 2025 could double the negative effects. However, the specific effects are difficult to quantify, as tariff rates have never been raised so sharply in the world’s current globalised economy.
The situation on the labour market has deteriorated noticeably. Since mid-2022, the number of unemployed people has risen by 20 per cent. That equates to more than 450,000 people. The unemployment rate has thus risen from 5.4 per cent to 6.3 per cent. Jobs are being lost mainly in manufacturing, construction and business services. At the same time, employment in the public sector, education and the healthcare sector continues to increase. The institutes expect unemployment to rise in the coming months. Unemployment is not expected to fall again until the economic situation improves over the course of 2026.
The phase of key interest rate cuts is likely to come to an end soon. In the USA, higher tariffs are jeopardising price stability. In the eurozone, a more expansive fiscal policy is causing capital market interest rates to rise, meaning that the key interest rate of 2.5 per cent is not far from its neutral level. If the fiscal rules in the eurozone are loosened, the capital markets will become more important as a control body for sustainable public finances.
Germany is not only suffering from a weak economy, but above all has structural problems. These cannot be solved by simply increasing government spending and make reforms to boost potential output all the more urgent. For example, the social security system needs to be adapted to demographic change so that non-wage labour costs do not continue to rise sharply.
The Joint Economic Forecast was prepared by the ifo Institute – Leibniz Institute for Economic Research at the University of Munich in cooperation with the Austrian Institute of Economic Research (WIFO) Vienna, the Kiel Institute for the World Economy, Halle Institute for Economic Research (IWH) – Member of the Leibniz Association, and RWI – Leibniz Institute for Economic Research in cooperation with the Institute for Advanced Studies Vienna.
Full report (in German)
About the Joint Economic Forecast
The Joint Economic Forecast is published twice a year on behalf of the Federal Ministry for Economic Affairs and Climate Action. The following institutes participated in the spring report 2025:
- German Institute for Economic Research (DIW Berlin)
- ifo Institute - Leibniz Institute for Economic Research at the University of Munich e. V. in cooperation with the Austrian Institute of Economic Research (WIFO) Vienna
- Kiel Institute for the World Economy
- Halle Institute for Economic Research (IWH) – Member of the Leibniz Association
- RWI - Leibniz Institute for Economic Research in cooperation with the Institute for Advanced Studies Vienna