By Rene Wagner and Maria Martinez

BERLIN (Reuters) -The OECD has trimmed its forecast for German economic growth next year due to political uncertainty and tight fiscal policy, while still anticipating stagnation this year, it said on Wednesday.

The world’s third-largest economy is expected to grow by 0.7% in 2025, down from a previously forecast 1.1%.

“In 2025, Germany will bring up the rear among OECD countries,” Isabell Koske, from the OECD, told Reuters.

The collapse of Germany’s ruling coalition last month is set to bring more economic pain in the months ahead and Trump victory in the U.S. presidential election raises the spectre of a tit-for-tat trade war with Germany’s main trading partner.

Medium-term uncertainty remains high after the failure to conclude negotiations on the 2025 budget and the fall of the coalition government, the OECD said.

Furthermore, the government had planned to implement several measures to revive economic growth, which due to the coalition break-up will likely not be adopted before the early elections in February 2025.

Europe’s biggest economy will lag the euro-zone average of 1.3% for 2024 and 1.5% in 2025.

For 2026, the OECD forecasts an acceleration of growth to 1.2%.

Low inflation and rising wages will support real incomes and private consumption, the OECD said in its economic outlook.

“Private investment will gradually pick up, supported by high corporate savings and slowly declining interest rates, but policy uncertainty will continue to weigh on investor confidence,” it said.

WEAK DEMAND AND TIGHT FISCAL POLICIES

Weak global demand has weighed on manufacturing production and competition from Chinese products is causing problems for German manufacturers, especially the automotive industry, OECD expert Robert Grundke told Reuters.

Exports will slowly recover as demand in key trading partners strengthens, the OECD said.

“Another reason for the relatively weak growth in Germany is the more restrictive fiscal policy compared to other countries in the euro zone,” said Koske.

The reinstatement of the debt brake, which caps public borrowing, and a court ruling last year that restricted the use of special funds led to a sharp reduction in public spending in 2024.

A new government will face the question of whether to allow higher public borrowing to prop up the flagging economy, reforming the debt brake.

Both OECD experts interviewed by Reuters recommend a debt brake reform to create fiscal space to address a large infrastructure backlog and support green and digital investments.

Increasing public spending efficiency, reducing environmentally harmful tax expenditures, and enhancing tax enforcement should be combined with more flexibility, the OECD said in its recommendations for the country.

(Reporting by Rene Wagner and Maria Martinez, editing by Rachel More and Philippa Fletcher)

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