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The German government on Wednesday slashed its gross domestic product forecast to just 0.3% growth in 2025.
This is down from a previous forecast of 1.1% growth, but broadly in line with estimates from bodies like the International Monetary Fund.

Economy and Climate Action Minister and Greens Party chancellor candidate Robert Habeck arrives for the weekly federal government cabinet meeting on January 29, 2025 in Berlin, Germany.
Sean Gallup | Getty Images News | Getty Images

The German government on Wednesday slashed its gross domestic product forecast to just 0.3% growth in 2025.
“The diagnosis is serious,” Robert Habeck, economy and climate minister, said during a press conference, according to a CNBC translation. He noted that, while there are some positive developments such as rising demand for credit, “Germany is stuck in stagnation.”

The latest GDP estimate is sharply down from an October projection of 1.1% growth this year, but broadly in line with forecasts from other economic bodies. The International Monetary Fund earlier this month cut its outlook and now sees 0.3% growth for the German economy this year, while the federal Bundesbank in December said it was anticipating the GDP to increase by 0.2% over the period.
In contrast, the association of German Industry on Tuesday forecast the country’s economy will contract by 0.1% in 2025, in what would be the third annual decline in a row.
Annual GDP figures released earlier this month showed that Germany’s economy contracted by 0.2% in 2024, after already shrinking 0.3% in the previous year. Quarterly GDP figures have also been sluggish, but so far a technical recession, which is characterized by two consecutive quarter of contraction, has been avoided.
Habeck said that several key reasons underpinned the downward revision of the GDP forecast. Among them is the fact that the current government’s growth initiative plans could not be implemented fully because of the premature end of the administration’s term, along with questions surrounding the outcome of the upcoming election. Habeck also cited geopolitical uncertainty, following the White House return of U.S. President Donald Trump and the possibility of tariffs against European countries.
Looking ahead, the domestic economy will likely initially only show weak development this year due to continuing geopolitical uncertainty and a lack of clarity about the economic and fiscal direction of the new government, the German ministry for the economy and climate said in a statement accompanying its 2025 economic report.

It envisaged that the economy will then pick up pace as inflation falls, real incomes rise and economic conditions become clearer.
Habeck noted that 1.1% GDP growth was now being forecast for 2026.
Germany is headed for a federal election on Feb. 23, which is taking place earlier than originally planned after the country’s ruling coalition broke apart in November.

Structural challenges

Echoing Finance Minister Jörg Kukies’ comments to CNBC last week, Habeck on Wednesday said that Germany suffers from structural problems, which he said were evidenced by the lack of upward development of the economy in recent years. In a statement on Wednesday he pointed to a shortage of laborers and skilled workers, exuberant bureaucracy and weak investment.
The finance minister added that Germany has been systematically underinvesting and that restrictive fiscal policies have been dampening growth.
A preliminary reading of Germany’s fourth quarter GDP is due out Thursday. The country’s statistics office earlier this month said that, based on the information available at the time, the economy pulled back by 0.1% in the three months to the end of December.
The Wednesday economic report also pegged inflation as set to average 2.2% this year. Germany’s consumer price index had fallen back below the European Central Bank’s 2% target in late summer, but has risen again since. More

The European Central Bank is set to kick off its 2025 meetings with another interest rate cut on Thursday, as traders aim to gauge how far it is willing to diverge from a stalled Federal Reserve.
Money markets were on Wednesday pricing in 35 basis points worth of rate cuts for the January meeting, indicating the euro zone’s central bank will cut by at least a quarter-percentage point.
A key question is whether the ECB is comfortable with the increasing distance between its own monetary policy path and that of the world’s biggest central bank, the Federal Reserve, which is set to hold rates on Wednesday.

The European Central Bank is widely expected to kick off its 2025 meetings with another interest rate cut on Thursday, as traders aim to gauge how far the central bank is willing to diverge from a stalled Federal Reserve.
Money markets on Wednesday were pricing in 35 basis points worth of rate cuts for the January meeting, indicating the euro zone’s central bank will cut by at least a quarter-percentage point. That would take the deposit facility, its key rate, to 2.75% marking its fifth trim since it began easing monetary policy in June 2024.

Market pricing then suggests follow-up cuts at the ECB’s March and June meetings, with a fourth and final reduction bringing the deposit facility to 2% by the end of the year.
Expectations for a swift pace of easing this year have solidified, even after headline euro area inflation increased for a third straight month in December. A slight uptick in the rate of price rises was expected due to effects from the energy market, while business activity indicators for the bloc show continued weakness in manufacturing and tepid consumer confidence. Economists polled by Reuters are expecting fourth-quarter growth figures to show GDP expanding just 0.1%, down from 0.4% in the third quarter.
While this week’s ECB rate move is near guaranteed, several key questions remain that its president, Christine Lagarde, will likely be quizzed on during her post-announcement press conference — and many of those relate to the U.S. and its new leader.
One concern is whether the ECB is comfortable with the increasing distance between its own monetary policy path and that of the world’s biggest central bank, the Federal Reserve, which is set to hold rates on Wednesday. Markets are pricing in just two quarter-point rate cuts from the Fed this year, as projected by Fed members in December.
Some strategists suggest the Fed could enact just one cut, and at the very least tread water as it awaits more detail on President Donald Trump’s actual policies versus his extreme trade threats and their potential inflationary impact.

Interest rates won’t fall as fast as expected if tariffs stoke inflation, UBS CEO says

Lagarde acknowledged that divergence in an interview at the World Economic Forum last week, telling CNBC that it was the result of different economic environments. While the euro area has fallen into stagnation, the U.S. economy has continued to grow at a solid clip in the higher interest rate environment, and many investors are optimistic on the 2025 outlook despite Trump uncertainty.
“We have to look at a differentiation here through the lens of growth and the spare capacity that is building up in the U.S. We have an economy that’s performing strongly and rapidly … We can’t say the same thing when we look at the euro zone,” Sandra Horsfield, economist at Investec, told CNBC’s “Squawk Box Europe” on Wednesday.
“That divergence does mean that inflationary pressures are more likely to be sustained for some time in the U.S.,” she said, leading her to forecast one more Fed cut followed by a pause, and a greater scope for cuts in Europe.

Currency drag

The ECB has repeatedly stressed that it is willing to move ahead of the Fed and that it is focusing on its domestic picture of inflation and growth. However, a major impact of policy differentials is in foreign exchange, with higher rates tending to boost a domestic currency.
This reinforces expectations that the euro could be pulled back to parity with the greenback and suggests even further strength for an already-mighty U.S. dollar in 2025. That matters for the ECB, because a weaker currency increases the cost of importing goods, even if the central bank’s bigger concerns right now relate to domestically-generated services and wage inflation.
Lagarde downplayed the impact of this effect, telling CNBC the exchange rate “will be of interest, and … may have consequences.”
However, she also said she was not concerned about the import of inflation from the U.S. to Europe and continues to expect price rises to cool toward target. The ECB president added that bullishness around the U.S. economy was a positive “because growth in the U.S. has always been a favorable factor for the rest of the world.” 

Trade question

While a weaker euro could be a factor that spurs the ECB to cut rates with slightly more caution, there is also the possibility that Trump sparks a global or even Europe-focused trade war which further slows euro zone growth and creates the need for even more cuts.
The U.S. president has not re-proposed his idea of sweeping, universal tariffs on imports to the U.S., and is currently zeroed in on duties targeting China, Mexico and Canada. However, in a speech at the World Economic Forum, he accused the European Union of treating the U.S. “very unfairly” on trade, pledging: “We’re going to do something about it.”

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Trade wars could disrupt global supply chains and stoke inflation, warranting higher interest rates at the ECB, said George Lagarias, chief economist at Forvis Mazars.
“Inflation and rate risks are definitely on the upside” for the euro zone, he told CNBC by email.
“EU company selling price expectations have flattened and show an upward tendency. This is a leading indicator to the ECB’s own projections … and the Fed will likely be on a more hawkish path, so significant divergence from the ECB could risk flight of capital towards the Dollar,” he added.
On the possibility that the ECB could enact a bigger half-point rate cut, he said: “If we do see a sharp rate cut, it would mean that the board seeks to protect growth in the core of the euro zone, and make sure that political uncertainty in France and Germany or a loose fiscal policy in Italy do not cause a precipitous rise in borrowing rates.”
Bas van Geffen, senior macro strategist at RaboResearch, also said he was “less optimistic when it comes to the inflation outlook than the ECB is, or markets appear to be,” forecasting a fall in rates to 2.25% this year.
“When the ECB incorporates Trump tariffs in their baseline scenario, we would expect higher inflation forecasts on their part too,” he told CNBC. More

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Sean is a former general counsel of the IMF. He is currently a professor at Georgetown Law and SciencesPo, and an adviser at Rothschild & Co.Sovereign debt crises tend to follow a pattern as recognisable as the stripes of a zebra. Every one is subtly different, but the fundamental features are the same. A struggling country unable to refinance its debts approaches the IMF for a loan to avoid default. The IMF obliges, provided the country adopts an economic adjustment program that addresses its problems. For the IMF, the objective is to be a catalyst: its loan, coupled with the adjustment program, is designed to help the country regain the confidence of markets. Unsurprisingly, the IMF has to exercise greater scrutiny as the size of the loan grows. And since the county’s capacity to repay the IMF depends on the success of the economic adjustment, bigger programs require stricter scrutiny In a recently published report examining how the IMF has been applying its policy on large loans — the “Exceptional Access Policy” — the IMF’s independent watchdog found that this strict scrutiny has been, well, not so strict. The Independent Evaluation Office’s own emphasis below:While the EAP has improved upon the Fund’s previous more discretionary approach, it has not enhanced the standards of IMF lending as envisaged. The EAP has provided guardrails by obliging the institution — including the staff, management, and the Board — to consider in a structured manner key aspects of EA programs. It has enhanced decision-making procedures through greater Executive Board engagement and provided a vehicle for learning lessons and enhancing accountability through the EPEs. However, the EAP has not provided a substantively higher standard for EA programs compared with NA programs, and it has not fully settled expectations about the Fund’s lending and assumption of risk nor addressed concerns about uniformity of treatment. EA programs have generally been ineffective in catalyzing private capital inflows, and they rarely involved debt restructuring.Given that the intention was to replace excessive optimism with analytical rigour and realism, it’s ironic that the IEO found that over-optimism was greater in exceptional access programs than in normal (ie smaller) programs.  Why did the envisaged realism and scrutiny not materialise? Taking into account interviews with both IMF staff and outside observers, the IEO concluded that, at least in a number of “high profile cases”, there was considerable pressure for the IMF to lend, even when it was questionable as to whether the proposed program satisfied the requirements under the policy. Alphaville’s emphasis below:Outside the Fund, there is a strong perception of political pressures in some high-profile cases affecting the assessment of (Exceptional Access Criteria]. Internally, this perception is shared by many and the analysis for this evaluation confirms that pressures on staff and management, exerted directly or indirectly, were strong in high-stakes cases. The majority view among staff is that the EACs have not sufficed to shield the Fund from the pressure in favor of lending when the fulfillment of the criteria is questionable and, therefore, the effectiveness of the framework hinges on staff and management’s determination to apply it rigorously. These perceptions affect the credibility and reputation of the Fund, which is seen as being more flexible in some cases depending on the pressure exerted.For anyone who has been involved in the resolution of sovereign debt crises, the existence of this “pressure” is hardly surprising. Although the IMF generally relies on the catalytic approach — which allows for creditors to be paid under the original contractual terms — the IMF cannot do so if it determines that the member’s debt is unsustainable. In other words, when the debt burden is so high that there is no feasible adjustment that would enable the country to repay its debt without some form of debt reduction. At that point, the IMF is required to ensure that any program be accompanied by a debt restructuring that restores sustainability. Since failure to do so would undermine the interests of the country, it would also be contrary to the IMF’s mandate. The problem is — and this is where the pressure comes in — there is often an alignment of interests against a debt restructuring.Even though it may be in the interests of the country in the medium term, a debt workout will probably create short term economic dislocation and, accordingly, domestic political instability — indeed, it may cost the minister of finance his or her job. Unsurprisingly, creditors whose claims are falling due would also prefer to be paid under the original terms. And finally, as was illustrated in the case of Greece, concerns regarding contagion may cause other countries to exert pressure on the IMF to lend without a restructuring. This pressure will often translate into over-optimistic assumptions regarding the IMF’s Debt Sustainability Analysis (DSA), the analytical tool developed by the IMF to assess sustainability. And, as noted by the IEO:IMF programs entail finding the correct combination of policy adjustment, financing, and (if needed) debt restructuring. If macroeconomic projections and DSAs are optimistic, Fund access effectively becomes a substitute for necessary restructuring.Given this tendency, the IEO’s finding that debt restructurings were rare under exceptional access cases is hardly surprising. The IEO’s recommendations are somewhat schizophrenic, however. On the one hand, it focuses on reforms that would give stronger guidance on what is required by the policy, thereby effectively giving the IMF less wriggle room to replace realism with optimism. One the other hand, it proposes the creation of an “exceptional circumstances” clause that would enable the IMF to lend in “rare” cases where the standards under the policy have not been met.While more specific guidance would be helpful, the creation of an exceptional circumstances clause would not be. Given the general pressure to avoid a debt restructuring, the “tightening” of the policy to be achieved through more specific guidance would almost certainly simply result in the frequent use of the exceptional circumstances clause.But more fundamentally, it’s unlikely to help the country — which is the IMF’s central mission. While it would introduce transparency and make life easier for staff (they would no long have to try to justify the unjustifiable), it will undermine the success of the program. After all, a central objective of IMF financing is to nurture a return of market confidence, and investors will not view the use of the exceptional circumstances clause as a vote of confidence by the IMF in the strength of the country’s program.Moreover, an additional reform feature is needed: the introduction of hard access limits, at least in certain circumstances (see this report for more details of this proposal). One of the assumptions underpinning the catalytic approach is that a larger loan can be more effective since it signals to the market a greater degree of IMF confidence in the program. That is why there are no ex ante limits under the exceptional access policy. However, one of the striking findings of the IEO is that exceptional access programs have actually been less catalytic than normal programs:EA programs have generally been ineffective in catalyzing private capital inflows, and they rarely involved debt restructuring. While they have sometimes resolved members’ BOP problems, in a number of cases problems have remained, as reflected in members’ repeated use of Fund resources and continued debt vulnerabilities. We shouldn’t be surprised, particularly given that a number of exceptional access programs were found to be excessively optimistic regarding debt sustainability. When there is continued uncertainty regarding the sustainability of a country’s debt, a large amount of financing by the IMF will actually deter private inflows. Because of the IMF’s preferred creditor status, creditors will naturally fear that in any future debt restructuring they will need to bear a larger burden of the required debt relief, because IMF’s own claims are shielded from the restructuring process. Not only did the IEO make this observation, it was also one of the lessons learned in an ex post evaluation of the IMF’s unsuccessful program with Argentina, where even the IMF itself didn’t have full confidence in the country’s debt sustainability. To address this problem, there should be hard upper limits on the amount of IMF financing a country can receive when the Fund’s staff reckon that the country’s debt are sustainable — but not with high probability (often referred to as the “grey zone” category). In contrast, there would be no ex ante limits when the IMF has full confidence that the c debt is sustainable. Consistent with the policy on “normal” access limits, these limits would be expressed as a percentage of a country’s quota in the IMF, and would be reviewed regularly to take into account the IMF’s financial firepower relative to the size of global capital flows. The IMF’s failure to address the problems that have arisen with its exceptional access policy creates substantial risks. Delays in addressing debt sustainability problems undermine both the welfare of the country and the mandate of the IMF. It also threatens to undermine the IMF’s preferred creditor status. When a restructuring of unsustainable debt has been unnecessarily delayed, pressure from the private sector will grow for the IMF to participate in the debt restructuring process — particularly if its claims have become a large portion of the debt stock . . .  More