Germany’'s economic recovery looks weaker than expected in the spring. This is the conclusion reached by experts at the German Institute for Economic Research (DIW). They lowered their growth forecasts for this year by 0.5’e.
DIW chief economist Geraldine Dany-Knedlik says the ‘Energy price shock is clearly slowing the recovery. However, he stresses that the situation is not a repeat of 2022/23’. This was the year when Russia launched the ’'s large-scale invasion of Ukraine. Dany-Knedlik explains: ‘Shock is smaller, energy resources are still safe, and Germany is now less dependent on fossil fuel imports than it was after the start of the war in Ukraine.’
The chief economist, ‘, says public spending is the only reason the economy is growing this year. Household demand is weakening, and companies have become more cautious recently. Higher defense spending and increased government spending through private funding, for example, support economic growth.
The government had already revised its growth forecast downwards in its spring forecasts. Initially, growth of 1.0 percent was assumed, but only 0.5 percent was expected by the end of April. This is in line with the prediction of the Kiel Institute for World Economics (IfW). But the federal government makes it clear that private consumption continues to be the pillar of the economy. Public investments, on the other hand, give a significant impetus to growth.
Stability through defense spending
In a recent press release, the DIW suggests that funds from the special budget for infrastructure and climate neutrality, combined with increased defense spending and a delay, support the German economy and ensure moderate growth in both forecast years.
Dany-Knedlik, ‘However, these fiscal policy impulses do not completely compensate for the cyclical setback, ’ adds. What is important is that resources from private funds are distributed quickly and in a real way in addition to existing budgets, rather than just financing investments that are already planned.‘
The DIW describes other problems facing the German economy as ‘structural’. The industry is no longer as competitive as it used to be, especially the automotive sector is under pressure. High production costs and demographic change also put pressure on competitiveness. These factors limit growth potential, regardless of the current geopolitical situation, and make a rapid cyclical recovery even more difficult, according to the institute.
As an energy producer, the U.S. is the winner, while the eurozone is the loser.
Internationally, DIW estimates that as a major energy producer, ABD’ will continue to record relatively robust growth rates of just over 2%’, while the outlook for the Eurozone will be significantly weaker.
Meanwhile, the U.S. has become one of the world's largest exporters of liquefied natural gas (LNG) and is forced to import European energy while partially taking advantage of high gas prices. RussiaWhen ’'s natural gas supply was cut off, its first port of call for new deliveries was overseas.
Europe is dependent on imports because it cannot produce enough energy on its own. Any related price shock is a burden on the economy and erodes purchasing power. DIW does not expect a supply shock, arguing that oil and gas supply security is not at risk, especially thanks to a diversified structuring.
But energy-intensive sectors such as chemistry, steel and paper are suffering from rising electricity and gas prices. According to DIW assumptions, this means that Germany’ is more affected than other European countries.
Expanding fiscal policy buffers inflation but fails to fully absorb it
While the shock slows growth and also pushes prices up, Dany-Knedlik describes it as ‘, a disturbing situation. So far, expansionary fiscal policy has been able to buffer particularly high inflation. However, it cannot achieve the desired growth.
Consumers are also feeling the impact of rising energy costs for heating, electricity and transportation in their daily lives. As the Ifo Institute noted in ’'s Joint Economic Forecast for the spring of 2026, this leaves less money for private consumption. The European Central Bank remains unclear whether ’ will respond to the rate hike on Thursday.
This is a problem, as the government currently sees consumption as one of the main drivers of growth in the German economy. DIW has a more critical view, arguing that growth stems only from the public sector.
Structural changes in the labor market also play a role. Employment in manufacturing and retail is declining, while employment in the public sector is steadily increasing. The structural change towards services is evident, but the overall number of people working is decreasing.
Employers, trade unions and leaders of the ruling coalition are gathering in the bloodlines today to discuss reforms. Social partners were asked, among other things, to prepare their views in advance on the key factors behind the German ’'s persistent structural growth weakness.
