German economy faces tepid growth in 2026 due to global trade slowdown, says IW institute

By Rene Wagner and Maria Martinez

BERLIN, Dec 5 (Reuters) - Germany's economic recovery will remain subdued next year as exports struggle and global trade slows, according to a forecast by the German Economic Institute IW seen by Reuters on Friday.

The IW forecasts Germany's real gross domestic product to grow only slightly this year, by 0.1% after two years of contraction, before hitting 0.9% next year, marking a notable increase.

Germany is "emerging somewhat from its state of shock," IW chief economist Michael Groemling said.

However, about a third of this growth will be due to a calendar effect, with nearly two-and-a-half more working days available than in 2025, according to the IW.

Germany's economy ministry in October revised up its 2025 forecast to 0.2% growth and it expects 1.3% growth in 2026.

TAXES AND SOCIAL CONTRIBUTIONS REACH RECORD HIGH

The tax and social contribution rate in Germany will reach a record 41.5% of gross domestic product in 2025, up from 40.2% last year, according to IW forecasts.

"Our economy is facing rising government financing burdens - even in economically weak times," Groemling said.

This is due to higher defence spending and investments in infrastructure, but also to rising social obligations for pensions, health insurance and unemployment insurance, Groemling said.

GLOBAL TRADE TENSIONS TAKE THEIR TOLL ON GERMANY

The negative impact of U.S. tariff policies and ongoing geopolitical tensions are increasingly evident worldwide: After a 4.5 % increase in 2025, world trade is expected to grow by only 1.5% in 2026.

Foreign trade stress continues to weigh on private sector investment in Germany, while government investment plans are not expected to materialise significantly next year, said the IW.

Nevertheless, private and public investment together are forecast to contribute half a percentage point to growth in 2026.

EMPLOYMENT PROSPECTS REMAIN MUTED

Consumer spending is expected to remain below potential, despite inflation stabilising at around 2%, as employment prospects remain muted, IW said.

Unemployment is projected to hover near 3 million, with overall employment stagnating. The industrial sector is set to shed more jobs, further dampening the outlook.

Germany's debt-to-GDP ratio is forecast to rise to 66%, while the government's share of economic output will exceed 50%, reflecting increased fiscal pressures.