KfW Research expects gross domestic product to fall again in 2025

• German GDP is likely to contract by 0.2 per cent in real terms
• KfW Research predicts moderate growth of 0.3 per cent in 2026
• At 2.4 per cent, inflation in 2025 is set to be slightly higher than previously expected

KfW Research expects Germany's gross domestic product (GDP) to drop again by 0.2 per cent in the current year 2025 (previous forecast: +0.5 per cent). Positive and negative quarterly GDP growth rates have regularly alternated in a sawtooth-shaped pattern for three years now. On balance, GDP at the end of last year only roughly matched the level of the fourth quarter of 2019, before the outbreak of the COVID-19 pandemic.

"The German economy is in a deep stagnation. I expect the sawtooth-shaped business cycle to continue for the time being",

said Dr Klaus Borger, economist at KfW Research.

"To be sure, the initiated relaxation of European monetary policy and the noticeably higher real wages are providing some buoyancy. Still, household consumption as a strong driver can be factored out for 2025 since real wage momentum is already waning again and the household saving rate is likely to remain high as a result of rising unemployment risks.”

Besides, businesses remain reluctant to invest in the face of very dim business expectations and high geopolitical and trade uncertainty. The threats of tariffs from the US are not painting a rosy export outlook either.

In its initial forecast for 2026, KfW Research expects real GDP growth of 0.3 per cent.

Its new forecast for euro area GDP growth is for 0.6 per cent growth in real terms this year (previous forecast: +0.8 per cent). Cyclical and trade uncertainties are weighing on business and consumer sentiment here as well. For 2026, KfW Research expects euro area growth to pick up moderately in real terms to 0.8 per cent. US protectionism is likely to exert its strongest braking effect in 2026, but higher investment and consumption expenditure will offset this. Spain will presumably achieve the highest real growth of the four large euro area countries.

As a result of persistent services inflation, KfW Research has slightly upgraded its inflation forecast to 2.4 per cent on average for 2025 for Germany (previous forecast: +2.1 per cent) and 2.2 per cent for the euro area (previous forecast: +2.0 per cent). Inflation is likely to drop to 2.2 per cent in Germany and 2.0 per cent in the euro area on average for the coming year. The inflation forecasts are based on the EU-wide Harmonised Index of Consumer Prices.

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