Leading German economic research institutes have made a slight upward revision to their growth forecast for the current year. The revised projection anticipates a growth rate of +0.2 percent for the national economy, compared to the 0.1 percent growth initially projected in the spring. Forecasts remain unchanged at 1.3 percent for 2026 and 1.4 percent for 2027.
“The German economy remains on uncertain footing” stated Geraldine Dany-Knedlik, Head of Forecasting and Economic Policy at the German Institute for Economic Research (DIW). “While a noticeable recovery is expected over the next two years, this dynamic is unlikely to be sustained given persistent structural weaknesses.
The German government is leveraging expanded borrowing rules to bolster defense capabilities and invest in infrastructure and climate protection, which is expected to stimulate economic activity. However, several factors are tempering this impact. Firstly, delays in planning and procurement processes mean that funds, for projects such as construction and defense acquisitions, will be released more slowly than initially budgeted. Secondly, the borrowing is partly used to avoid necessary fiscal consolidation. Finally, a substantial consolidation effort is projected for 2027, despite the delayed release of funds derived from the expanded borrowing powers.
While domestic demand is gathering momentum, the underlying structural problems are largely being masked by this temporary boost. Crucial reforms aimed at strengthening the nation’s long-term competitiveness are, as yet, lacking. The outlook appears to be deteriorating, reflected in anticipated declines in the growth rate of the country’s productive potential. High energy and labor costs in comparison to international competitors, ongoing skills shortages and a continued decline in competitiveness are all contributing factors that are diminishing long-term growth prospects.
The service sector, particularly in the public sector, is expected to experience robust growth over the next two years. However, the recovery in the manufacturing sector is projected to be more subdued. A key challenge is the weakening foreign demand for German goods, attributable to decreasing competitiveness and increasing tariffs. Strong export growth is therefore unlikely to serve as a primary driver of economic performance. The anticipated economic rebound is primarily concentrated within the domestic economy and supported by expansionary fiscal policies.
As the economy picks up, conditions on the labor market are also expected to improve considerably. Coupled with rising disposable incomes, this is expected to bolster private consumption, in turn stimulating demand for consumer-facing services. Consumer prices are anticipated to increase by approximately two percent throughout the forecast period.
The German economy is facing considerable risks, including the potential for escalation in the trade dispute between the United States and the European Union, particularly if commitments made by the EU are not adhered to. Furthermore, the overall macroeconomic impact of the expanded fiscal policy remains difficult to assess and is heavily reliant on how it is specifically implemented.
The “Gemeinschaftsdiagnose” (Joint Diagnosis) is a collaborative effort undertaken by the Ifo, DIW, IfW, RWI and IWH institutes, commissioned by the Federal Ministry for Economic Affairs and Climate Action. It serves as a foundational document for the government’s own projections, which are then used in determining the tax revenue forecast.
