Germany’s economic rebound is losing momentum as an ongoing energy shock, weak industrial performance and structural challenges weigh on growth, according to new analysis from the German Institute for Economic Research (DIW), which has sharply downgraded its forecast for the year.
The institute now expects gross domestic product to grow by just 0.5%, cutting its previous projection in half. Economists say the revision reflects a combination of higher energy costs, subdued private demand and declining competitiveness in key industrial sectors.
DIW chief economist Geraldine Dany-Knedlik said the energy price shock continues to slow recovery, although she stressed the situation is less severe than during the 2022–23 crisis that followed Russia’s invasion of Ukraine. Energy supplies remain stable and Germany’s dependence on fossil fuel imports has decreased, she noted, but price pressures are still affecting households and industry.
According to the DIW, public spending is currently the main factor keeping the economy in positive territory. Increased government expenditure, particularly on defence and infrastructure, is offsetting weakness in household consumption and cautious corporate investment. However, economists warn this support is not strong enough to fully counteract the broader downturn.
Fiscal measures, including special funds for defence and climate-related investment, are expected to provide some stability over the coming years. However, Dany-Knedlik said these measures only partially cushion the slowdown and must be implemented efficiently to have a meaningful impact on long-term growth.
The institute also pointed to deeper structural problems in the German economy. Manufacturing competitiveness has weakened, particularly in the automotive sector, while high production costs and demographic change continue to weigh on output potential. These factors, analysts say, are limiting Germany’s ability to achieve a strong cyclical recovery even if short-term conditions improve.
The energy dimension remains a key constraint. As Europe continues to rely heavily on imported energy, higher prices are eroding purchasing power and raising costs for energy-intensive industries such as chemicals, steel and paper. While supply security is not considered at risk, volatility in global markets continues to pressure European economies more heavily than those with domestic energy production.
DIW estimates contrast Germany’s outlook with that of the United States, which is expected to maintain growth of just above 2%, supported in part by its role as a major exporter of liquefied natural gas. In comparison, euro area growth is expected to remain significantly weaker.
Rising energy costs are also feeding into household budgets, reducing disposable income and weakening private consumption, which policymakers had previously seen as a key driver of recovery. Some research institutes warn that this trend could persist if inflation remains elevated.
At the same time, labour market shifts are reshaping the economy. Manufacturing and retail employment is declining, while public sector jobs continue to expand, reflecting a broader structural shift toward services. However, overall employment growth is slowing.
Political and economic leaders are meeting in Berlin to discuss potential reforms aimed at addressing Germany’s long-term growth weaknesses, as pressure mounts to restore competitiveness and stabilise the recovery path.
