“Major German economic research institutes are warning that Germany is losing its growth momentum. Economists’ calculations indicate that growth in potential output will grind to a halt by 2030. Currently, this figure is still estimated at an annual increase of around 0.2 percent. "We have to get used to average gross domestic product (GDP) growth rates of zero percent," Timo Wollmershäuser, head of economic forecasting at the Ifo Institute, told journalists in Berlin on Wednesday. In their joint spring report, the institutes have halved their growth forecast for this year from 1.3 percent to 0.6 percent.
One reason for this is energy prices, which have risen drastically as a result of the war involving Iran.
Of greater concern is the fact that economic researchers assess industrial dynamism within the German economy as even weaker than before—partly due to a decline in competitiveness. According to the report, gross value added in the manufacturing sector, goods exports, and corporate investment are all significantly lower than estimated last autumn. The report predicts that corporate investment in machinery, equipment, and vehicles will fall for the fourth consecutive year. Exports are expected to remain roughly stagnant following two years of decline.
With their forecast of a decline in productivity potential, the institutes are more pessimistic than, for instance, the German Council of Economic Experts. Evidently, they do not expect the federal government's promised infrastructure investments to yield significant productivity gains. In the report, the economists point out that, as things stand, the special fund is largely being used to finance non-investment-related expenditures.
Wollmershäuser cited two reasons for the poor medium-term growth outlook.
The former "productivity core" of the German economy, the industrial sector is losing ground.
It remains unclear whether new hubs of productivity are emerging. Furthermore, the workforce is shrinking due to the aging population, and older employees often work fewer hours than younger ones. In their report, the economists point out that the rate of part-time employment among men is also rising, thereby dampening the growth of production potential. "Strain on social security systems will increase massively," said Oliver Holtemöller, Vice President of the IWH Halle.
The researchers view with concern recent statements by Chancellor Friedrich Merz (CDU) regarding the return of Syrians to their home country. "That would deal another blow to production potential," said Wollmershäuser. Many Syrians are well-integrated into the labor market; immigration in recent years has helped mitigate the consequences of demographic change.
In their short-term forecast, the economists expect that rising oil and gas prices and energy market disruptions resulting from the war with Iran will dampen—but not halt—the economic recovery. They attribute even greater cyclical significance than before to the federal government's debt-financed fiscal stimulus measures, particularly for 2027, as they anticipate an accelerated outflow of funds from the special assets and reduced efforts to consolidate the state budget.
The public sector deficit is projected to rise from 2.7 percent of GDP last year to 3.7 percent this year and 4.2 percent next year. Concurrently, gross debt is forecast to grow from 63.6 percent to 67.2 percent of economic output. The economists recommend that policymakers focus on core state functions to keep the ratio of government spending and debt levels under control and to comply with European Union fiscal rules. According to the report, the state has significantly expanded its influence on economic activity through expansionary fiscal policy—a move the economists view as having a dampening effect on growth. Government revenues have failed to keep pace with the rapid rise in spending.
The institutes project economic growth of 0.6 percent for this year, accelerating to 0.9 percent next year. This would mark the fastest pace of economic growth since 2022. Rising energy prices, which will filter through the economy, are forecast to drive the inflation rate up to 2.8 percent and 2.9 percent, respectively.
The economists’ forecast assumes that the Strait of Hormuz will reopen by June at the latest, leading to a subsequent drop in energy prices. In line with financial market expectations, the forecast assumes that crude oil will be one-third more expensive this year than in 2025. Natural gas prices are projected to rise by 46 percent. The researchers assess the economic consequences of the war in Iran as less severe than those of the events in Ukraine or the coronavirus crisis. However, if production stoppages in Asia were to cause international supply chains to snap, "there would presumably not be much left of Germany's economic recovery," said Wollmershäuser.
"We strongly advise against blanket market interventions such as a fuel price rebate," he said regarding the political debate over measures to counter rising energy prices. In his view, it would be better to provide targeted relief—for instance, by raising basic social security benefits mid-year—to households hit hardest by the surge in energy prices. "Germany is becoming poorer as a result of this energy price shock," said Holtemöller. Funds for relief measures would have to be saved elsewhere, as there is no remaining room for further borrowing. "We need a steady hand in policy-making," said Stefan Kooths, head of the business cycle research group at the Kiel Institute for the World Economy. "We are seeing little of that at the moment." Regarding the reform debate currently underway within the federal government, Holtemöller pointed out that income tax is not the primary problem for low-income earners. "If you want to provide relief to the general population, you have to lower social security contributions."
The researchers advocated abolishing premium-free coverage for spouses under the statutory health insurance system. According to the institutes' economic policy recommendations, decoupling health insurance contributions from earned income and switching to a premium-based model to finance the healthcare system would generally boost work incentives. Social balancing would then need to be achieved through income tax. The economists view this as advantageous because it means that earned income would not be the sole basis used for redistribution.
"Reform policies should not wait until the middle of the legislative term to begin," Kooths warned. The joint economic forecast by the five major economic research institutes in Kiel, Berlin, Essen, Halle, and Munich serves as the basis for the Federal Government’s new growth projection, which in turn forms the foundation for the tax revenue estimate.” [1]
1. Deutschland verliert Wachstumskraft. Frankfurter Allgemeine Zeitung; Frankfurt. 02 Apr 2026: 19. Von Julia Löhr, Berlin, und Patrick Welter, Frankfurt
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