Germany needs 'reliable economic policy decisions,' institute urges

A billboard of the ifo Institute - Leibniz Institute for Economic Research at the University of Munich e. V. Dresden branch. Arno Burgi/ZB/dpa

Germany needs "reliable economic policy decisions" to achieve sustained growth, a leading economic institute said on Thursday.

The Munich-based ifo Institute said gross domestic product (GDP) could rise by as much as 1.1% next year if policymakers can reduce uncertainty about the direction of the German economy, which ifo argued "has been holding back investors and consumers for years."

Policies to stimulate growth include "a lower tax burden on companies as well as falling bureaucracy and energy costs, expansion of the digital, energy and transportation infrastructure and an increase in the supply of labour," the institute added.

A failure to enact necessary decisions could leave German growth at just 0.4% in 2025, the report said.

A deep rift over Germany's economic malaise has brought down the coalition of Chancellor Olaf Scholz, with fresh elections expected in February.

"At the moment, it is not yet clear whether the current phase of stagnation is a temporary weakness or one that is permanent," ifo economist Timo Wollmershäuser said.

The institute said German businesses are struggling due to a lack of demand, as consumers continue to suffer from a loss of purchasing power following a period of high inflation, with wages failing to keep up.

Meanwhile, orders from abroad have also fallen, despite a general economic recovery across the world.

If German policymakers fail to act, ifo warned, there is a risk of "creeping deindustrialization" in which German companies relocate production and investment abroad.

Structural changes away from industry and towards more services would hamper productivity, with a temporary increase in unemployment to be expected and growth remaining at a miserly 0.8% in 2026.