Germany faces third year of recession for first time in post-war history

Berlin — German economic institutes on Thursday cut their growth forecast for this year to 0.1% from the 0.8% expected in September, taking into consideration initial US tariffs on steel, aluminium and cars, confirming an earlier Reuters report.

Exports-dependent Germany is the only G7 economy that has contracted for the last two years.

The further “reciprocal” tariffs announced by US President Donald Trump on April 2 and suspended on Wednesday could still deal a major blow to Europe’s biggest economy, the institutes said, possibly “doubling the negative effects.”

This could put Germany on track for a third year of recession for the first time in post-war history. Trump’s “aggressive trade policy (is) keeping the global economy on tenterhooks,” said Klaus Weyerstrass of the Vienna-based research institute IHS, which contributed to the forecast.

“The additional trade barriers are a significant burden on the global economy ... especially because of their unpredictability,” he said. “Changes to tariffs can occur practically daily, which has increased economic policy uncertainty to an unprecedented degree.”

German conservatives under Friedrich Merz agreed a coalition deal with the centre-left Social Democrats on Wednesday, aiming to revive growth in Europe’s largest economy.

The institutes’ new forecasts factor in US tariffs of 25% on EU aluminium, steel and cars — which are still in place — but not the tariff increases of 20% on other goods announced last week and suspended for a 90-day period on Wednesday.

For 2026, the institutes forecast economic growth of 1.3%, unchanged from the previous forecast. After the February election, the conservatives led by chancellor-in-waiting Merz and the Social Democrats announced a €500bn fund for infrastructure and sweeping changes to borrowing rules to bolster defence and revive growth.

The fiscal package would likely lead to additional government spending of €24bn in 2026, adding half a percentage point to economic growth, the institutes said.

Torsten Schmidt of the RWI institute, which also contributed to the forecast, warned that additional spending in areas such as civil engineering and defence should be executed over time.

The new government “needs to exercise a bit of judgment here to channel the funds in such a way that they promote growth in the real economy and do not simply evaporate in price effects,” he said.

Economic weakness is set to take a toll on the German labour market, however. Unemployment is seen edging higher this year to 6.3% from 6.0% in 2024, before falling to 6.2% next year.

Inflation in Germany is expected by the institutes at 2.2% this year, before falling to 2.1% in 2026.

The economy ministry incorporates the combined estimates from the institutes — IFO, DIW, IWH, IfW and RWI — into its own predictions.

Reuters