Economic outlook brightens with Ifo's endorsement, yet higher unemployment rates predicted
The German economy is bracing for a challenging year ahead, as economists predict a rise in inflation and unemployment rates. According to the Ifo Institute, inflation is expected to rise to 2.6 percent next year, a concerning figure for the country's economic stability.
Additionally, the settlement in the trade dispute between the US and the EU is not expected to have any immediate effects on the German economy. The Ifo Institute has downgraded its growth outlook for the German economy for next year, lowering the forecast for 2026 growth by 0.2 percentage points to 1.3 percent.
The institute's chief economist, Timo Wollmershäuser, has stated that US tariffs continue to burden the German economy. The tariffs, which were raised by the US government under former President Donald Trump, specifically through increases in steel and aluminum tariffs and the introduction of a 15 percent tariff on many EU goods as of August 2025, have been a significant factor in the country's economic struggles.
Wollmershäuser has also warned that unemployment in Germany is likely to remain above six percent until 2027. In August, the number of unemployed people in Germany exceeded three million for the first time since 2015. The number of unemployed could increase by 155,000, and the unemployment rate could rise to 6.3 percent.
The uncertainty associated with the trade dispute is likely to gradually decrease, supporting the economy. However, the future of the German economy's recovery largely depends on the Berlin coalition. If there is a standstill in economic policy, further years of economic stagnation and erosion of the business location are threatened.
On a positive note, the economic policy measures of the federal government are expected to take effect mainly from next year. If implemented consistently and convincingly, fiscal policy could help pull the German economy out of the crisis.
The US remains the most important customer for "Made in Germany" goods, with tariffs of 15 percent demanded for most goods. The assumed recovery for 2026 will be weak, according to the new economic forecast by the Munich economists.
In 2024, the average inflation rate was 2.2 percent. Despite these challenges, the German economy has been in a crisis for three years and is not moving forward. The EU's trade agreement with the US has not significantly improved the situation for the German economy.
If the German economy is to recover, it will require decisive action and a commitment to effective economic policies. The Ifo Institute's forecast serves as a stark reminder of the challenges ahead and the need for a strong response from policymakers.
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