BERLIN. In 2025, Germany finds itself at a crossroads. The government has downgraded its growth forecast to zero amid prolonged economic stagnation, trade tensions with the United States, and deep-rooted structural challenges. As incoming Chancellor Friedrich Merz unveils a bold investment strategy, questions remain: can fiscal firepower revive Europe’s largest economy?
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Germany’s Zero Growth Forecast: A Postwar Anomaly
Germany’s federal government has revised its 2025 growth forecast down to zero, from a previous estimate of 0.3%. According to the Financial Times, this marks the third consecutive year of economic contraction or stagnation, making it the longest slump in Germany’s postwar history. GDP shrank by 0.3% in 2023 and 0.2% in 2024. The primary culprit? A significant downturn in exports, with a projected drop of 2.2% in 2025.
“The German economy is preparing for turbulence,” said Clemens Fuest of the Ifo Institute, noting increasing uncertainty among manufacturers.
Trump’s Tariffs and the Export Economy’s Achilles Heel
At the heart of Germany’s woes lies the resurgent trade protectionism of former U.S. President Donald Trump. His imposition of 20% reciprocal tariffs on EU imports—later temporarily reduced to 10%—has rattled Germany’s export-heavy economy.
“The German economy is once again facing major challenges due to the unpredictable trade policy of the United States,” said outgoing Green economy minister Robert Habeck.
This uncertainty undermines investment and throws global supply chains into disarray, particularly for German industrial giants dependent on transatlantic trade.
Merz’s Economic Pivot: Fiscal Stimulus with High Stakes
Friedrich Merz, likely to assume office in May, has pledged up to €1 trillion in new debt-funded investments, targeting infrastructure, defense, and regulatory reform. The ambition: to jolt the economy out of stagnation and boost long-term competitiveness.
“This will determine whether the German economy receives a boost to its competitiveness or whether the large amount of money is wasted,” Habeck cautioned.
CER Commentary:
From a macroeconomic standpoint, this is a textbook response to secular stagnation—massive fiscal stimulus in an economy operating below potential. But stimulus without reform risks becoming a fiscal sinkhole. The effectiveness of Merz’s plan hinges not just on spending, but on the productivity of that spending.
Germany is attempting to transition from an export-led model to one driven by domestic demand and innovation. If successful, Merz’s pivot could redefine Germany’s growth narrative for the next decade.
Business Sentiment: Tentative Optimism Amid Structural Drag
Despite grim forecasts, Germany’s Ifo Business Climate Index saw a slight uptick in April to 86.9. While this suggests some cautious optimism, the broader sentiment remains muted. Businesses are wary of U.S. trade policy shifts and await clarity from Berlin on regulatory reforms and tax incentives.
Looking Ahead: Recovery or Reinvention?
The government projects a modest recovery in 2026, with GDP expected to grow by 1%. Inflation is forecasted to decrease to 2% in 2025 and further to 1.9% in 2026. Yet the path forward depends heavily on geopolitical stability and the actual implementation of structural reforms.
CER >> Economy >> OKN >> Photo: Berlin, by Johannes Plenio >> 24.04.2025
