Leading German economic research institutes have substantially revised upward their growth projections for the current year, doubling their earlier estimates. The community assessment published on Thursday raised expectations for economic performance in 2026 to 1.3%, compared to a forecast of just 0.6% presented in spring. Looking ahead, they project growth of 1.1% for 2027 (up from 0.9%) but predict a slowdown to only 0.4% in 2028.
Oliver Holtemöller, Chief Economist at the Leibniz Institute for Economic Research Halle (IWH), commented on the mixed picture, stating that “the economy has developed more robustly than expected. However, the upturn rests on a narrow foundation, as high energy prices and structural issues are putting pressure on it.” Furthermore, low water levels during the current quarter are temporarily restraining activity. The state deficit continues to increase, creating mounting pressure for fiscal consolidation.
In the first half of 2026, the German economy performed significantly stronger than the institutes had anticipated in the spring. This strong start was primarily fueled by surprisingly sharp increases in exports and value creation within the manufacturing sector. These positive impulses came from the strong global economy and the worldwide AI boom, while competitors in the Gulf region faced considerable production setbacks due to the Iran conflict. Increased government consumption also provided support. However, business investments and private consumption remained weak. Although the energy price shock linked to the Iran conflict slowed the German economy, the higher costs for fuel and heating oil have yet to translate substantially into general consumer prices.
This recovery has since moderated in the third quarter. While confidence indicators have shown some improvement, hard economic data is reflecting a weaker performance in the current period. The low water levels, which have persisted since mid-July, are particularly hindering production in the chemical industry. Concurrently, elevated energy prices are dampening purchasing power and thus private consumption. GDP is only expected to have increased by 0.1% compared to the previous quarter. The production constraints are anticipated to ease starting in the fourth quarter as water levels normalize, supported by robust foreign demand and rising public spending on defense and infrastructure.
The institutes project the continuation of the upswing into 2027, largely driven by domestic demand. Private consumption is expected to rise moderately, supported by real disposable incomes, and housing investment should gradually increase. Overall, however, private investment activity is likely to remain sluggish. In 2028, the rate of expansion is expected to slow down, revealing increasing structural limits to the growth. Demographics are leading to a shrinking labor force potential, and the potential growth rate continues to decline. Consequently, even minor growth rates may soon be sufficient to fully utilize the economy’s capacity.
Regarding inflation, experts predict a rise initially from 2.8% this year to 3.2% in 2027, before falling back to 2.0% in 2028. The labor market recovery is also expected to be delayed. Employment will continue to decline initially, although the unemployment rate is forecast to drop from 6.4% in 2026 to 6.2% in 2027, and further to 5.8% in 2028.
In the interim, the institutes warn of a growing need for fiscal policy intervention. Projected growth in the state financing deficit is set to rise from 4.1% of GDP this year to 4.7% in 2028. The increase in net primary expenditures is likely to significantly surpass the path outlined in European regulations. Even if the reformed national debt brake is adhered to, the debt-to-GDP ratio is likely to continue rising in the medium term, compounded by sharply increasing interest payments. These factors contribute to an escalating requirement for consolidation.
