The Ifo Institute has updated its projection for Germany’s economic growth. They now expect a slight increase of 0.2% for this year, down from their earlier prediction of 0.3%. Looking ahead, they foresee the economy growing by 1.3% in 2026, a reduction from the previous forecast of 1.5%. For 2027, the Ifo Institute projects a growth rate of 1.6% for Germany. They highlight that US tariffs are still a challenge for the country. If economic policies do not change, Germany may encounter additional difficulties, which could harm future business prospects. The latest Ifo forecast cuts the growth for 2025 to a minimal 0.2%. This trend reinforces the economic stagnation in Germany and suggests continued pressure on corporate earnings, especially in the industrial sector. Recent data shows a 1.1% drop in factory orders, as reported by Destatis in August 2025, confirming this ongoing weakness. For traders focusing on derivatives, this outlook hints at a bearish strategy for the German DAX index in the upcoming weeks. We believe that put options or short positions on DAX futures could be effective ways to prepare for potential declines. The index has struggled, and this news could lead to testing lower support levels not reached since the second quarter. On the other hand, this situation may support German government bonds, likely resulting in lower yields. A stagnant economy makes it unlikely for the European Central Bank to raise interest rates and could even prompt discussions about rate cuts. We predict increased demand for 10-year Bund futures as traders anticipate a more accommodating ECB. The Euro may face challenges, especially against the US dollar, due to Germany’s key role in the Eurozone economy. The mention of US tariffs as a significant threat underscores the vulnerability of Germany’s export-driven model, which accounted for over 47% of its GDP in 2024. We expect traders to test the lower limits of the recent EUR/USD range, possibly breaking below crucial support levels. Additionally, we foresee rising market volatility due to this uncertain outlook. The warning about “economic paralysis” introduces considerable policy uncertainty, which can heighten market anxiety. Traders might consider buying options on the VDAX-NEW index for protection, as it could see a sharp increase from its current lows, similar to what we observed during the slowdown in 2023.

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