KfW Research lowers forecast for economic growth in 2025

• Gross domestic product in Germany is expected to grow by 0.5% in 2025 – instead of 1.0% as previously expected
• Forecast for 2024 slightly adjusted to now stand at -0.1%
• Expectations for private consumption are falling; eyes are now anxiously on the USA

KfW Research has slightly lowered its forecast for growth in the current year 2024 to -0.1% (preliminary forecast: +0.1%) in real terms. The growth rate reported by the Federal Statistical Office for the third quarter today is roughly in line with the expectations from the summer forecast. However, the contraction in the second quarter has been corrected downwards, which has a negative effect on growth for 2024 as a whole.

The German economy will remain in difficult waters in the coming year. While in the summer forecast, KfW Research was still expecting growth of 1.0%, this has now been lowered to stand at just 0.5%.

"After the expected moderate recovery in the winter of 2024/2025, there is still the threat of a situation in which positive and negative quarterly growth rates alternate. As a result, macroeconomic production capacities are likely to remain underutilised in the coming year"

, said Dr Philipp Scheuermeyer, economic expert at KfW Research.

Some of the reasons for the GDP forecast for 2025 are as follows:

- Private purchasing power is expected to increase at a slower pace than in 2024 due to stagnating wage growth. In addition, job growth is no longer serving as an economic support. As a result, private consumption remains the most important economic driver, but with less traction than previously assumed.

- Low capacity utilisation in industry, pessimistic business expectations and the deterioration in location conditions reported by many companies are putting a strain on business investment activities. However, some tailwind for corporate investment and, above all, housing investment comes from monetary easing by the European Central Bank. Over the year, housing investments are therefore likely to increase slightly again, with corporate investments somewhat stagnating.

- In the wake of Donald Trump’s election as the new US president, political and economic uncertainty are on the rise. Especially the introduction of new tariffs on all US imports that was frequently promised during the election campaign would be detrimental to the German economy. KfW Research’s economic forecast is based on the assumption that the new US government will start advancing its protectionist agenda at the very start of its term of office but will only enforce some of the planned tariff increases to begin with in order to use the possibility of enforcing the full scope of the tariff increases as a negotiating tool. Therefore, while before the US election KfW Research was still expecting significant growth in German exports for 2025 due to an upturn in global trade in goods, it now expects only slight growth.

- "With the snap election, uncertainty about politics in Germany will also remain high until the conclusion of coalition negotiations, especially since until then it will only be possible to manage the budget on a provisional basis. On the other hand, possibilities of higher growth than forecast could arise, particularly in the event of a significant downturn in the currently unusually high savings rate in Germany",

said KfW economic expert Dr Philipp Scheuermeyer.

Uncertainty about the introduction of US tariffs is also dampening the outlook for the euro area. KfW Research is therefore reducing the forecast for GDP growth in the euro area to plus 1.0% next year, compared to the previous forecast made in the summer of plus 1.3%.

The latest KfW Business Cycle Compass is available at: KfW Business Cycle Compass | KfW