Minimal Growth Expected
The Kiel Institute for the World Economy (IfW) forecasts that the German economy will experience minimal growth of 0.1% in 2025 after two years of contraction. Improved business expectations and increased government spending may uplift prospects, but US tariffs present obstacles in the near term.
For the future, IfW predicts a gradual recovery, with growth expected to be 1.3% in 2026 and 1.2% in 2027. The budget deficit may also widen, going from 2% of GDP in 2024 to around 3.5% by 2027.
Given the forecast for the German economy to grow by only 0.1% this year, we see limited upside for German equities. This follows two years of economic contraction, a pattern confirmed by the latest industrial production figures for July 2025, which showed a 0.5% month-over-month decline. In the coming weeks, we should consider shorting DAX index futures or buying put options on the index.
The threat of US tariffs presents a direct risk to Germany’s export-heavy industries, particularly the automotive sector. We saw how trade disputes impacted stocks like Volkswagen and BMW back in the 2018-2020 period, and this new risk creates a similar downside potential. It would be wise to hedge exposure or initiate bearish positions on these export-oriented companies.
Economic Pressure and Strategies
The projection of a widening budget deficit, potentially reaching 3.5% of GDP by 2027, adds pressure on the Euro. This, combined with the European Central Bank holding interest rates steady at its August 2025 meeting amid weak growth, suggests a bearish outlook for the currency. We view shorting the EUR/USD pair as a viable strategy for the near term.
While there is some mention of improved business expectations, these positive signs appear fragile. Any market rallies based on this sentiment could present better entry points for our bearish positions. We expect volatility, as measured by the VDAX-NEW index, to remain elevated as the market digests this conflicting information.
With a slight recovery only predicted for 2026, our focus should remain on short-term derivative contracts. We should be looking at options expiring in the fourth quarter of 2025 to capitalize on the immediate stagnation. Longer-term bearish bets seem less certain given the potential for an eventual, albeit slow, economic rebound.
