German economic advisory panel forecasts stagnation this year

The German Council of Economic Experts has significantly lowered its 2025 GDP growth forecast for Germany, now predicting stagnation instead of the previously projected 0.4% growth, citing a "pronounced phase of weakness" due to fiscal restraints, an industrial downturn, and potential negative impacts from U.S. tariffs, particularly given the U.S. was Germany's largest trading partner in 2024 with 253 billion euros in trade; however, a recently approved 500-billion-euro fiscal package for infrastructure and defense investments is expected to spur 1.0% growth in 2026.

Analysis

Germany's economic outlook has notably worsened, with the German Council of Economic Experts revising its 2025 GDP growth forecast downward from 0.4% growth to stagnation, indicating a "pronounced phase of weakness." This stark revision stems from persistent fiscal restraints and an ongoing industrial downturn, factors that have contributed to Germany being the only G7 economy that failed to achieve growth over the last two years. The situation is further complicated by potential U.S. tariffs, which pose a significant threat to Germany's export-driven economy, especially given that the U.S. was its largest trading partner in 2024, with bilateral goods trade reaching €253 billion. Despite the near-term headwinds, a €500 billion fiscal package approved in March, targeting infrastructure and defense investments, is expected to stimulate a recovery, with the Council projecting 1.0% GDP growth in 2026. These funds are anticipated to boost investment in construction and equipment, alongside government spending and private consumption, from 2026 onwards.

Key Decisions for Investors

• Investors should adopt a cautious stance on German-centric investments for 2025, reflecting the forecast economic stagnation and the considerable risk from potential U.S. tariffs on its export-oriented sectors.
• Closely monitor the specific details and implementation progress of the €500 billion fiscal stimulus, as its effectiveness will be crucial for the anticipated return to 1.0% growth in 2026.
• Re-assess exposure to German export industries, particularly those heavily reliant on U.S. trade, while identifying potential medium-term (2026 onwards) investment opportunities in sectors such as construction, capital goods, and defense, which are direct beneficiaries of the fiscal package.