Germany’s economic outlook is facing a significant challenge due to persistent trade tensions, specifically the impact of US tariffs. The tariff growth drag is now causing leading economic institutes to substantially revise their growth forecasts downward. The Ifo Institute, along with other prominent German economic research bodies, issued stark warnings on Thursday, September 4, 2025, painting a concerning picture for Europe’s largest economy, already reeling from two years of economic contraction. This analysis delves into the specifics of these revised forecasts, the underlying causes, and the potential consequences for the German economy.
Revised Economic Forecasts: A Closer Look
The Ifo Institute, a Munich-based think tank, has significantly reduced its growth expectations for the German economy. The institute now projects a GDP expansion of only 0.2% in 2025 and 1.3% in 2026. These figures represent a decrease of 0.1 and 0.2 percentage points, respectively, compared to the summer projections. Similarly, the Kiel Institute for the World Economy (IfW) has adjusted its 2025 growth forecast downward to 0.1% from a previous estimate of 0.3%.
These downward revisions follow a brief period of increased exports to the US in early 2025, driven by anticipatory frontloading ahead of the tariff implementations. However, the actual imposition of new US tariffs in April 2025, coupled with the threat of further tariff hikes, is now demonstrably impacting economic activity. The Bundesbank and the Leibniz Institute for Economic Research (RWI) are also closely monitoring these developments, contributing to the growing consensus on the negative impact of these tariffs.
The “Implausible” Tariff Strategy
According to Ifo, the US tariff policy is the primary driver behind the revised growth outlook. Ifo President Clemens Fuest has openly criticized the US tariff strategy, labeling it as “implausible.” Fuest argues that the strategy’s focus on trade balance, rather than productivity, is misguided. He contends that productivity is the true measure of an economy’s competitiveness, not simply the balance of imports and exports.
Ifo experts highlight three specific ways in which the US tariffs are negatively affecting the German economy:
- Reduced Exports to the US: The most direct impact is the decline in German exports to the United States as tariffs make German goods more expensive for American consumers and businesses.
- Decreased Exports to China: The tariffs are also indirectly affecting German exports to China. As China’s competitiveness is diminished by the US tariffs, its demand for German goods, particularly capital goods and machinery, also declines.
- Increased Competitive Pressure: The tariffs are causing other countries to redirect their exports to markets traditionally served by Germany. This increases competitive pressure on German businesses in these markets, further dampening export growth.
Regional Impact of the Tariff Growth Drag
The impact of the tariffs is not uniform across Germany. States with a strong presence in the automotive industry, such as Saarland, Lower Saxony, and Baden-Württemberg, are particularly vulnerable to the negative effects. These regions are experiencing a decline in industrial value-added as automotive exports suffer due to the tariffs. This uneven impact highlights the structural vulnerabilities of the German economy to trade protectionism and the importance of diversifying its export markets.
Economic Consequences and Mitigation Efforts
The tariffs are expected to have a broad impact on the German economy, affecting consumption, investment, and exports. The Ifo Institute projects an increase in the unemployment rate to 6.3% in 2025, with an estimated 155,000 additional people becoming unemployed. This rise in unemployment will put further strain on the German social safety net and could lead to increased social unrest.
In response to these challenges, the German government has planned fiscal stimulus measures, including a €9 billion boost this year, rising to €38 billion in 2026. However, these measures are expected to provide impetus only with a delay and are unlikely to fully offset the negative impact of the tariffs. The European Commission has also been engaged in discussions with the US to resolve the tariff dispute. While an agreement has been reached between the US and the EU, Ifo anticipates that the effective tariffs will largely remain the same, meaning that the agreement will have a limited impact on the forecasts. However, the associated uncertainty may gradually recede, providing some relief to German businesses.
Germany’s Existing Economic Challenges
It’s important to note that the US tariffs are not the only factor contributing to Germany’s economic woes. The German economy has been facing a number of challenges in recent years, including weak global demand, high energy costs, and a decline in industrial output. These existing challenges have made the German economy more susceptible to the adverse effects of the tariffs.
Timo Wollmershaeuser, Ifo’s head of forecasts, has warned that “if economic policy remains at a standstill, further years of economic paralysis and erosion of Germany as a business location threaten.” This statement underscores the urgent need for Germany to address its structural economic challenges and implement policies that promote innovation, investment, and competitiveness.
Conclusion
The revised economic forecasts from the Ifo Institute and other German economic research bodies paint a concerning picture for the German economy. The persistent drag from US tariffs is significantly dampening growth prospects, exacerbating existing economic challenges, and potentially leading to increased unemployment. While the German government and the European Commission are taking steps to mitigate the impact of the tariffs, it remains to be seen whether these efforts will be sufficient to prevent further economic deterioration. The future of the German economy hinges on addressing both the immediate challenges posed by the tariffs and the underlying structural issues that have made it vulnerable to external shocks.
