The Organization for Economic Cooperation and Development (OECD) has revised its economic growth forecast for Germany, predicting a slower rate of 0.7% in 2025, a decrease from the previously projected 1.1%.
Isabell Koske of the OECD highlighted the nation's expected underperformance, stating, "In 2025, Germany will bring up the rear among OECD countries."
This downgrade comes in the wake of political turmoil following the collapse of Germany's ruling coalition last month, which is anticipated to exacerbate economic challenges. The recent victory of Donald Trump in the U.S. presidential election has also heightened concerns over potential trade conflicts with the United States, Germany's key trading ally.
The OECD pointed to the heightened medium-term uncertainty stemming from the inability to finalize the 2025 budget and the disintegration of the coalition government
As a result of the political instability, several economic stimulus measures planned by the government are now unlikely to be enacted before the early elections scheduled for February 2025.
Germany, Europe's largest economy, is expected to trail the euro-zone's average growth rates of 1.3% in 2024 and 1.5% in 2025. Despite the near-term challenges, the OECD foresees an uptick in economic activity for Germany in 2026, with growth accelerating to 1.2%.
Supporting factors for the economy include low inflation and increasing wages, which are projected to bolster real incomes and private consumption. The OECD also anticipates a gradual recovery in private investment, fueled by high corporate savings and a slow decline in interest rates.
However, persistent policy uncertainty is likely to continue dampening investor confidence, according to the OECD's economic outlook.
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