"The German economy is adapting to structural change through innovation and new business models only slowly and at great expense," says ifo economic researcher Timo Wollmershäuser. "In addition, companies and start-ups in particular are hindered by bureaucratic hurdles and an outdated infrastructure."

Economic growth: forecasts from 2025 to 2027

Compared to the autumn forecast, the ifo Institute has reduced its expectations for 2025 by 0.1 percentage points and for 2026 and 2027 by 0.5 percentage points each. The growth forecast for 2027 is now 1.1%.

US tariff policy continues to have a noticeable impact on the German export industry. According to the ifo forecast, the higher US tariffs will dampen growth by 0.3 percentage points in 2025 and 0.6 percentage points in 2026. "The uncertainty caused by the tariffs remains high, even if the acute conflicts between the US and the EU have been defused," says Wollmershäuser.

Although the global economy will grow moderately by an average of 2.5 percent per year between 2025 and 2027, German industry will not benefit from this and will continue to lose competitiveness.

Effects of government investment: Limited impact on the economy

The planned government investments from the special funds for infrastructure and defense as well as further relief for companies and consumers will only have a delayed effect. A growth effect of 0.3 percentage points is expected for 2026 and 0.7 percentage points for 2027.

"The federal government's measures will help in the short term, but they are not enough to expand the production capacities of the German economy in the long term," warns Wollmershäuser.

Production potential of the German economy revised significantly downwards

The ifo Institute is therefore revising production potential significantly downwards: For 2027, it is 0.7 percentage points lower than forecast in the fall. "The German economy is losing momentum because the potential workforce, corporate investment and productivity growth are declining," explains Wollmershäuser.

"Without structural reforms, there is a risk of further erosion of the economy. Measures are needed to strengthen the supply of labour by providing additional incentives to extend working hours or participation in the labour market, or to increase productivity through comprehensive digitalization and simplification of the state system."

Unemployment, inflation and prices - what the economy is struggling with

According to the ifo forecast, unemployment will rise by 161,000 people to 6.3% in 2025 before stagnating in 2026 and falling slightly to 5.9% in 2027. Inflation will remain just above the 2 percent mark (2025: 2.2 percent, 2026: 2.2 percent, 2027: 2.3 percent). Energy prices will continue to fall, while service prices and wage costs will keep core inflation above 2%.