KfW Research has revised its forecast for Germany's economic performance in 2025, predicting a contraction of 0.2 percent in the country's gross domestic product (GDP). This is a downward adjustment from an earlier projection of 0.5 percent growth. The German economy has experienced alternating positive and negative quarterly GDP growth rates over the past three years, maintaining a sawtooth pattern that has left GDP levels similar to those seen at the end of 2019.
Dr. Klaus Borger, an economist at KfW Research, commented on the situation: "The German economy is in a deep stagnation. I expect the sawtooth-shaped business cycle to continue for the time being."
Despite some positive factors such as relaxed European monetary policy and higher real wages, Dr. Borger noted that household consumption is unlikely to drive growth in 2025 due to waning real wage momentum and high household saving rates amid rising unemployment risks. Additionally, businesses are hesitant to invest due to uncertain business expectations and geopolitical tensions, including potential tariffs from the United States affecting export prospects.
Looking ahead to 2026, KfW Research anticipates moderate GDP growth of 0.3 percent for Germany.
For the euro area, KfW Research forecasts a real GDP growth rate of 0.6 percent this year, down from an earlier estimate of 0.8 percent. Business and consumer sentiment across Europe are affected by cyclical and trade uncertainties. However, growth is expected to improve slightly in 2026 with a projected increase of 0.8 percent in real terms.
Inflation forecasts have also been adjusted upward by KfW Research due to persistent services inflation. The average inflation rate for Germany is now expected to be 2.4 percent in 2025, up from a previous estimate of 2.1 percent, while the euro area's inflation rate is projected at 2.2 percent compared to an earlier forecast of 2.0 percent.
These inflation predictions rely on data from the EU-wide Harmonised Index of Consumer Prices.