The Leibniz Institute for Economic Research Halle (IWH) predicts a stronger recovery for the German economy, aligning with the outlook from the Ifo Institute. The IWH reported on Thursday that despite higher energy prices, an increase in foreign demand propelled the German economy onto a recovery path in the first half of the year.
Looking ahead, the institute anticipates that increased governmental investment will continue to support the economy. Based on its autumn forecast, the Gross Domestic Product (GDP) is expected to grow by 1.4 percent this year and by 0.8 percent in 2027. However, this improvement is less pronounced in Eastern Germany. Previously, IWH economists had forecasted a 0.9 percent growth for both the current and following years.
In the mid-to-late summer of 2026, the international economy is set for expansion, driven largely by investments fueled by the Artificial Intelligence (AI) boom. These investments are predominantly occurring in the United States, leading to a surge in exports for key producers of necessary capital goods. While global oil prices have risen due to the Gulf conflict, the real price is reportedly lower than during previous energy crises, mainly because of reduced demand from China.
IWH experts expect that higher inflation rates, stemming from increased energy costs, will prompt the central banks in the US and the Eurozone to raise interest rates in the coming quarters. Although fiscal policy in both economic areas is currently slightly expansionary, it is projected to become more restrictive by 2027. Overall, the outlook for a stable global economy remains positive, as the AI boom is expected to persist, according to the institute. Nevertheless, accelerated growth is not anticipated, partly because the production capacities of the industries benefiting from the boom are already fully utilized.
Oliver Holtemöller, Head of Macroeconomics and Vice President of the IWH, commented that “The German economy is on a recovery path.” He noted that GDP grew noticeably for the third consecutive time in the second quarter of 2026, mirroring the previous quarter’s rise, primarily due to increasing exports-a positive trend after a decline since early 2023. Nevertheless, employment numbers are still declining, particularly within the manufacturing sector. Thus, while value-added and export figures indicate that some companies are benefiting from strong international demand, the sector remains in a crisis state.
Regarding other spending aggregators, the IWH has seen little sign of recovery in the first half of the year. Private consumption is being dampened by losses in purchasing power due to the surge in energy prices, and private equipment investment did not exceed the level of two and a half years ago in the second quarter. Although low river levels, which hampered manufacturing production, have started to rise since mid-August, they remain a factor. In the coming quarters, the expansionary stance of fiscal policy is expected to translate more noticeably into increased investment. Experts also cite improving sentiment indicators, such as the Ifo business expectations index, as another factor supporting economic stability.
Holtemöller warned that the perennial risk to Germany and Europe remains the potential for an energy crisis. He explained that the global supply of liquefied natural gas (LNG) is more severely constrained than world oil supplies due to the considerable reduction in supply from Qatar. Europe relies on natural gas imports, and current storage levels are below long-term averages. Furthermore, Holtemöller stated that the current recovery in Germany is fragile because it relies heavily on stronger foreign demand, which could quickly weaken if the AI boom concludes or if German providers continue to lose competitiveness.
In a related update, the RWI, alongside the Ifo Institute and the IWH, also raised its economic forecasts. The Essen Institute now expects 1.3 percent growth for the German economy in 2026 and a GDP increase of 1.1 percent in 2027 and 0.5 percent in 2028. These are higher than the projections made in early summer; in June, the RWI had forecasted 0.8 percent GDP growth for both 2026 and 2027. These predictions have now been raised by 0.5 percentage points and 0.3 percentage points, respectively.
