Germany’s economy is set to contract by 0.2 per cent this year, leaving the country in recession, according to a new forecast by the Cologne-based German Economic Institute.

The country is particularly affected by the ongoing trade conflict triggered by the U.S. government’s tariffs, the IW explained.

Global uncertainties that are discouraging businesses from making investments contribute to the downturn, with declines in major purchases such as new machinery and vehicles.

High operating costs in Germany further complicate the situation.

The IW concluded that the country will remain in recession, with gross domestic product having shrunk by 0.2 per cent in 2024.

The biggest risk to the global economy this year, according to the IW, is U.S. trade policy.

The institute said that global economic output in 2025 could be up to 0.8 per cent higher without the U.S. tariff policy.

The outlook for both the industrial and construction sectors remains grim. Industrial companies are expected to generate fewer added values this year, following a three per cent decline in 2024.

High energy prices, rising wages and increasing regulation are placing additional pressure on businesses.

After a 3.7 per cent drop in 2024, construction companies face further constraints this year, with high construction costs driven by regulation continuing to hinder the sector.

The IW has also observed that these trends are now affecting the labour market, with the number of people employed declining since mid-2024.

By summer, the number of unemployed people could reach three million, a level not seen since 2010, the economists said.

Michael Grömling, head of macroeconomic research at the IW, said Germany’s new government now has the opportunity to reverse the trend, pointing at the country’s planned special infrastructure fund, which could help stimulate the economy.

(dpa/NAN)