Germany Downgrades Growth Outlook, Now Expects Recession For Record 3rd Year, Blames Trump

Entering 2025, Germany’s economic situation had never been worse: following a 6th consecutive GDP contraction in Q4, the country which was once Europe’s growth dynamo, has contracted for 6 consecutive quarters, the longest recessionary stretch in modern German history (since its 1989 reunification).

But if anyone had hoped that the recent German pro-debt “revolution” in which Berlin eliminated its long-standing “debt brake” and unleashed an unlimited, debt-funded “defense” spending spree courtesy of an anti-democratic, fiscal stimulus putsch, which was rammed through in the final days of the outgoing government (even as the top political party in the new government campaigned on precisely the opposite plaform) meant that Germany would finally record some modest growth, will be very disappointed.

Earlier today, the German government slashed its economic growth forecast yet again, and now sees stagnation in 2025 instead of a 0.3% expansion as its had previously. The reason: why blame Trump of course, or as Reuters put it, “uncertainty from global trade disputes is set to hobble growth and dampen investment.”

Exports are expected to fall by 2.2% this year, following a 1.1% decline in 2024. Next year, exports are expected to rise by 1.3%, but they won’t since by then most German export markets will be in an even worse recession. Earlier this month, German economic institutes cut their growth forecast for this year to 0.1% from the 0.8% expected in September, taking into consideration initial U.S. tariffs on steel, aluminium and cars.

Germany was the only G7 economy that failed to grow for the last two years, and the tariffs announced by U.S. President Donald Trump could put Europe’s largest economy on track for a third year without growth for the first time in history.

Only, it’s not really Trump. Germany’s energy intensive, export-driven economy was already struggling with high energy costs and weak global demand for its products as foreign companies – mostly China – chipped away at its competitiveness, and destroyed demand for German cars.

And while the US may or may not have stagflation (spoiler alert: it won’t), Germany is now in it, with the government forecasting sticky inflation falling to 2% this year and then to 1.9% next year, down from 2.2% last year, at a time when the economy is contracting.  At the same time, economic weakness will take its toll on the labour market, with the unemployment rate expected to go up to 6.3% this year from 6.0% last year, before falling to 6.2% in 2026.

In other words, the definition of stagflation.

While announcing the figures, Economy Minister Robert Habeck called for the European Union and the U.S. to find a solution on trade but also for the EU to prepare countermeasures if needed.

“Now the German economy is once again facing major challenges due to the unpredictable trade policy of the United States,” Habeck said in a written statement.

“Given the German economy’s close integration into global supply chains and our high level of foreign trade openness, the new US protectionism could have significant direct and indirect effects on our economic growth,” he said.

For 2026, the government now expects growth of 1%, down slightly from its January forecast of 1.1%, expecting some uptick under the incoming government of chancellor-in-waiting Friedrich Merz. Spoiler alert: expect yet another downward revision, and a record 4th year of contraction in about a year’s time.

And the cherry on top: just as Germany desperately needs a much weaker euro, the concurrent collapse in the dollar – which will unleash a surge in US exports just as the Mar-A-Lago accord had stipulated – means the euro will stay strong and only a fresh NIRP cycle by the ECB, one which sends the deposit rate from 2% currently back to sub zero, has any hope of kickstarting growth in what was once Europe’s strongest economy and is now officially the sick man of Europe.