German economy to grow 0.2% in 2025, DIW Berlin forecasts

The German Institute for Economic Research (DIW Berlin) projects a modest economic recovery for Germany, forecasting 0.2% GDP growth in 2025, a slight downward adjustment from its June prediction. This rebound is primarily attributed to domestic forces, notably public sector expansion through infrastructure and climate projects, increased defense spending, and corporate tax incentives, rather than foreign trade. Growth is expected to strengthen significantly to 1.7% in 2026 and 1.8% in 2027, with domestic demand becoming the main driver.

Analysis

The German economy is projecting a modest, domestically-fueled recovery, according to the German Institute for Economic Research (DIW Berlin). The institute forecasts GDP growth of 0.2% for 2025, a slight downward revision from its 0.3% prediction in June. This recovery is noted as being uncharacteristically driven by domestic forces rather than Germany's traditional export strength. Key catalysts identified are public sector expansion, including financing for infrastructure and climate projects, increased defense spending, and corporate investment tax incentives. Looking further ahead, the economic outlook strengthens significantly, with DIW projecting GDP growth to accelerate to 1.7% in 2026 and 1.8% in 2027. This longer-term expansion is expected to be sustained by domestic demand, which will become the primary growth driver and is anticipated to offset a declining contribution from net trade.

Key Decisions for Investors

• Investors should consider exposure to German companies in sectors set to benefit directly from the specified fiscal stimulus, particularly in infrastructure, defense, and green-technology industries.
• Given the forecast of a recovery driven by domestic demand rather than foreign trade, it may be prudent to re-evaluate holdings, potentially favoring companies with high domestic revenue exposure over export-oriented firms in the near term.
• The contrast between the weak 0.2% growth forecast for 2025 and the stronger outlook for 2026-2027 suggests patience may be warranted; long-term investors could see an entry point, but should monitor domestic consumption and investment data for signs of the projected acceleration before increasing positions significantly.