Tariff Chaos Overshadowing the Global Economy; Fiscal Package Bolstering the German Economy

Despite a strong start to 2025, the German economy will experience middling growth for the time being before beginning a long-awaited upturn at the end of the year. DIW Berlin’s forecast indicates growth of 0.3 percent for 2025 and of 1.7 percent for 2026; thus, DIW Berlin is increasing its forecast significantly. Expansionary fiscal policy is counteracting the effects of higher tariffs. From 2026 onwards, the multi-billion euro fiscal package is expected to provide considerable funds to boost consumption and investment. The new fiscal leeway will hardly have any impact this year, as the public budget for 2025 is not expected to be passed until the fall, which will delay planning, approval, and procurement procedures. Even for 2026, the funds provided are likely to fall short of the average annual 40 billion euros that would be invested in infrastructure if the funds were distributed evenly over the intended 12-year period. Nevertheless, the positive effects will be noticeable and counteract the dampening effects of the structural weakness of industrial production and of foreign trade, which has been hit by high US tariffs. However, risks to economic development remain: ongoing geopolitical tensions and a possible escalation of the trade conflict between the United States and the EU. The German economy had a strong start to the year primarily due to the front-loading of goods exports to the United States due to the threats of tariffs by the Trump administration. However, private consumption also grew, while the seasonally adjusted savings rate experienced an exceptional decline. Glimmers of hope emerged for the manufacturing industry, but sentiment among service providers dampened somewhat recently. In the second quarter, only slight front-loading is expected for exports, although not as strongly as in the first three months of the year. Private consumption should continue to increase, albeit at a slower pace. The situation on the labor market remains tense, as the unemployment rate is rising and people are worried about job losses. During the second half of 2025, the economy should cool down slightly before speeding up at the end of the year as the fiscal policy measures gradually begin to have an impact. At 2.1 percent in 2025, inflation will remain stable before rising slightly to 2.2 percent in 2026. Some EU Member States, and thus the entire euro area, should benefit from the overall positive development in Germany. On balance, though, the global economy remains clouded by US tariff policy. However, this tariff policy will probably affect the United States itself the most; its economy is expected to grow by only 1.4 percent in 2025 and by 1.6 percent in 2026. For the global economy, growth of 3.3 percent in 2025 and of 3.4 percent in 2026 is expected.