Germany’s GDP will expand by just 0.2% this year, the Munich-based Ifo Institute predicted today, below the 0.4% growth forecast in January

Germany’s economic growth forecast was halved by one of the country’s leading think tanks today, as a looming large-scale fiscal stimulus package failed to mitigate the impact of global trade tensions and policy uncertainty.

The Munich-based Ifo Institute now expects Germany’s GDP, the largest in the EU, to expand by just 0.2% this year – down from the 0.4% growth previously forecast in January.

The downgrade came despite the recent joint proposal by the opposition Christian Democrats and incumbent Social Democrats to loosen the country’s deficit rules to boost infrastructure and defence spending by around €1 trillion over the next decade.

The centre-right bloc, led by Friedrich Merz, is widely expected to head the country’s next government together with the centre-left after winning last month’s federal elections.

“The German economy is treading water. Despite a recovery in purchasing power, consumer sentiment remains subdued, and companies are also reluctant to invest,” said Timo Wollmershäuser, Ifo’s head of forecasts.

However, Wollmershäuser added that a successful implementation of the fiscal package – which represents a seismic shift away from Berlin’s prior commitment to balanced budgets – would significantly lift investor and consumer sentiment.

“Reliable economic policy is vital to creating confidence and stimulating investment,” he said.

The report comes amid persistent concerns about the state of Germany’s economy, which suffers from multiple structural challenges, including high energy prices, slowing Chinese demand, and global trade tensions – the latter largely a consequence of US President Donald Trump’s commitment to imposing wide-ranging tariffs.

Exacerbating its export industries’ exposure to American protectionism, the US overtook China to become Germany’s top trading partner last year, the country’s Federal Statistical Office reported last month.

The shift was largely due to slowing trade with China, where a steep decline in exports caused total trade to drop 3.1% compared to 2023. Beijing has been Germany’s top trading partner every year since 2015.

Meanwhile, trade with the US grew by just 0.1%.

In a note to clients today, Deutsche Bank analysts predicted that the spending package, which they estimate has a 95% chance of being passed, would boost German budget expenditure by an additional 3-4% of GDP over the next two years.

“Don’t underestimate how huge this package is,” the analysts said.

The plan is likely to be endorsed by the country’s parliament tomorrow and by its Federal Council on Friday.