The German Economic Institute has revised its 2025 GDP growth forecast down to +0.1% from +0.8%. This adjustment follows their previous estimate from September, as reported by Reuters.
While the institute is known for making credible forecasts, this reduction is not seen as unexpected.
German Economic Performance
The downgrade to a mere 0.1% for next year tells us one thing clearly—the economic momentum in Germany continues to underperform against earlier hopes. What this signals, more than just a reduced number on a chart, is a fading pace of domestic demand and weakness in industrial output, which was already under pressure last quarter. If one were expecting a swift turnaround or healthy contribution from business investment, that assumption should now be reconsidered.
We’re looking at an environment where forward-looking indicators have remained soft, and the pipeline of activity from exports is narrowing rather than widening. Remember, the earlier projection of 0.8% wasn’t optimistic by historical standards—it was cautious but still leaning towards growth. This now suggests fewer tailwinds for consumption and production sectors alike. The revised figure reflects base effects running out of steam and structural issues not being resolved as fast as policymakers might like.
Koch, the institute’s economic director, attributed this shift to weaker industrial dynamics and subdued global trade. That comes through in the data—order backlogs have been thinning out since early Q1, and price pressures have started shifting from producers to final demand more slowly than expected. Wage negotiations, while not out of control, are introducing a level of cost uncertainty that weighs on hiring and investment timelines.
From where we stand, the implications for positioning should focus on underperformance in cyclical sectors. Sensitivity to rate expectations will likely remain elevated, particularly for rates in Europe, since monetary policy is not about to pivot sharply unless incoming data deteriorates even faster. One doesn’t need to see a collapse; flatlining is enough to keep volatility higher on the short-end, while longer maturities might drift if inflation proves more persistent than currently forecasted.
Economic Indicators
A narrower revision, let’s say even to 0.6%, would have still lent some confidence to manufacturing and construction inputs. However, this near-stagnant estimate of 0.1% for the full year implies stagnation, bordering on mild contraction in per capita terms. That tends to be overlooked but matters when looking at consumer-facing equities or five-year bund futures.
We’ll need to chart activity rates by region more closely. Bavaria and Baden-Württemberg, typically among the healthier performers thanks to industrial clusters, are starting to reflect tightening credit and capex pullbacks. If those signals extend into Q4 forecasts, we might see further inventory drawdowns—adding to short-term price distortions.
To that end, we’ve begun factoring in a downward bias on large-cap exporters—particularly those with euro-sensitive pricing structures. The euro itself may see mild support from US economic softness, but against a backdrop of local stagnation, it’s unlikely to make more than a limited move. In past cycles like this, you see swap spreads widen briefly as protection demand picks up, before normalising again once it’s clear growth is neither rebounding nor plunging.
There’s no panic in the data. But there’s no room for complacency either. Traders invested in interest-rate sensitive vehicles should be prepared for higher tracking risk. The skew will remain under pressure if inflation data fails to soften in parallel with growth outlooks.
