After multiple years of contraction, the Bundesbank expects the economy to gradually recover. The German economy will make headway again in 2026: while progress will be subdued initially, it will then slowly pick up, said Bundesbank President Joachim Nagel, presenting the Bundesbank’s new Forecast for Germany. Starting in the second quarter of 2026, economic growth will strengthen markedly, driven mainly by government spending and a resurgence in exports, he explained.

There are already some initial signs of an increase in government orders. However, the expansionary spending stance will not bolster economic growth more significantly until later on next year. Additional defence and infrastructure expenditure will then push up government demand sharply. According to the Forecast for Germany, exports will also see a resurgence over the course of next year. In addition, investment in private residential construction will start to recover. Strongly rising wages and a gradual improvement in the labour market will underpin real income and thus consumption. With increased capacity utilisation, businesses will also invest more again. Overall, growth will accelerate significantly in 2027, the Bundesbank President said. 

In the current Forecast for Germany, the Bundesbank’s experts expect calendar-adjusted real gross domestic product (GDP) to rise by 0.6 % next year and by 1.3 % in 2027. With more working days in the next two years, unadjusted GDP rates are somewhat higher, at 0.9 % and 1.4 % respectively. Economic growth will continue in 2028 but, with a (calendar-adjusted) growth rate of 1.1 %, it will lose some momentum. Capacity utilisation in the German economy will then be high again, said Bundesbank President Nagel. The shortage of skilled workers will lead to increasing labour market tightness. 

While expansionary fiscal policy will boost economic activity, it will have only a limited impact on the potential output of the German economy. The Bundesbank’s experts estimate that potential output will grow by just 0.4 % per year over the forecast horizon. Broader structural reforms would be needed to sustainably strengthen this.

The inflation rate in Germany is declining a little more slowly than expected, said Dr Nagel. One major reason why inflation will fall more slowly than previously expected in the coming years is the continued high level of wage growth. Smaller declines in energy prices are another. According to the Forecast for Germany, inflation as measured by the Harmonised Index of Consumer Prices (HICP) will fall from an expected 2.3 % this year to 2.2 % in 2026. In 2027 and 2028, it will reach around 2 %. 

Additional spending on defence and infrastructure, tax cuts and larger transfers will be reflected in higher government debt in the coming years. The government deficit ratio will reach 4.8 % in 2028, while the Maastricht debt ratio will have risen to 68 %. Action is needed to ensure that sound government finances are safeguarded again going forward, said Bundesbank President Nagel, stressing, We remain committed to our proposal to further develop the debt brake. According to this proposal, deficits should, starting in 2030, be gradually reduced by increasingly financing defence spending without borrowing. We recommend a reformed rule that facilitates investment and establishes guardrails for borrowing. With this reform proposed by the Bundesbank, government debt as measured by gross domestic product would then be brought back down towards 60 % in the long term.