Leading German economic research institutes have modestly revised upwards their forecast for economic growth this year. The updated projection, released Thursday, anticipates a growth rate of +0.2 percent for the current year, a slight increase from the 0.1 percent forecast made earlier in the spring. Projections remain consistent for 2026 at 1.3 percent and for 2027 at 1.4 percent.
“The German economy remains on shaky ground” stated Geraldine Dany-Knedlik, Head of Forecasting and Economic Policy at the German Institute for Economic Research (DIW). “While a noticeable recovery is expected in the next two years, this momentum is unlikely to be sustained given persistent structural weaknesses.
The government is leveraging expanded debt rules to bolster defense capabilities and invest in infrastructure and climate protection, creating stimulus – albeit with limitations. Funds allocated for projects such as construction and armaments are expected to flow more slowly than initially budgeted due to lengthy planning and awarding processes. Additionally, the borrowing is partially intended to avoid necessary fiscal consolidation, creating a considerable need for such consolidation again as early as 2027, despite the delayed use of expanded credit options.
Economic activity within Germany is gaining traction, though underlying structural problems are being masked. Fundamental reforms aimed at strengthening the country’s competitive position remain absent, leading to a deterioration in perspectives and a likely decline in the growth rate of its production potential. High energy and labor costs compared internationally, coupled with skills shortages and continued weakening competitiveness, are hindering long-term growth prospects.
While service sectors, particularly in the public sector, are expected to experience robust growth in the next two years, the recovery in the manufacturing sector will likely be more restrained. Demand for German goods abroad is weakening, attributable to reduced competitiveness and increased tariffs, limiting exports as a major driver of economic growth. The recovery is currently being primarily supported by expansive fiscal policies, focusing on domestic demand.
Economic recovery is projected to positively impact the labor market. Combined with rising disposable incomes, this will boost private consumption, particularly in the consumer-services sector. Inflation is forecast to remain around a rate of just above two percent throughout the forecast period.
Overall, the German economy faces significant risks. The ongoing trade dispute between the United States and the European Union harbors potential for escalation, especially concerning the observance of commitments. Furthermore, the macroeconomic effects of expansive fiscal policy are difficult to predict and heavily reliant on their specific implementation.
The “Joint Diagnosis”, compiled by the institutes Ifo, DIW, IfW, RWI and IWH on behalf of the Federal Ministry for Economic Affairs and Climate Action, serves as a foundation for the government’s own economic projections, which in turn form the basis for the tax estimate.