Minimal Growth Expected

The Kiel Institute for the World Economy (IfW) predicts that the German economy will grow only 0.1% in 2025 after two years of decline. Better business expectations and increased government spending could help boost the economy, but US tariffs are a significant challenge in the short term. Looking ahead, IfW forecasts a slow recovery, estimating growth of 1.3% in 2026 and 1.2% in 2027. The budget deficit is also likely to widen, increasing from 2% of GDP in 2024 to about 3.5% by 2027. With growth projected at just 0.1% this year, we see limited potential for German stocks. This follows two consecutive years of economic decline, as shown by July 2025’s industrial production figures, which reported a 0.5% drop from the previous month. Therefore, we might consider shorting DAX index futures or buying put options on the index soon. US tariffs pose a direct threat to Germany’s export-driven industries, especially the automotive sector. We remember how trade disputes affected companies like Volkswagen and BMW from 2018 to 2020, and this new risk could similarly impact stock performance. It would be wise to hedge our investments or take bearish positions in these export-focused companies.

Economic Pressure and Strategies

The expected rise in the budget deficit, potentially hitting 3.5% of GDP by 2027, puts pressure on the Euro. Combined with the European Central Bank maintaining interest rates at its August 2025 meeting amidst weak growth, there is a bearish outlook for the currency. We recommend shorting the EUR/USD pair as a suitable strategy for the near term. While there are some signs of improved business expectations, these positives seem fragile. If the market rallies due to this sentiment, it may provide better chances to enter our bearish positions. We anticipate continued volatility, as indicated by the elevated VDAX-NEW index, as the market processes this mixed information. With only a slight recovery expected for 2026, our focus should be on short-term derivative contracts. We should target options expiring in the fourth quarter of 2025 to make the most of the current stagnation. Longer-term bearish positions appear riskier given the possibility of a slow, eventual recovery. Create your live VT Markets account and start trading now.

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