The recovery of the German economy is being delayed by uncertainty surrounding international trade policy. Only gradually will economic activity be boosted by fiscal measures. The German economy will continue to tread water in the current year. The new US tariffs and uncertainty about future US policy are dampening economic growth for the time being, said Bundesbank President Joachim Nagel, presenting the Bundesbank’s new Forecast for Germany. This has hit German industry at a time when it had begun to stabilise after a long period of weakness. However, the sharp rise in government defence and infrastructure expenditure is likely to cause a marked surge in demand and an increase in gross domestic product (GDP) from 2026 onwards. Moreover, according to the new forecast, inflationary pressures in Germany are continuing to ease. The Forecast for Germany thus also provides good news for consumers and the economy, Mr Nagel said.

Calendar-adjusted GDP is expected to stagnate in 2025. However, the Bundesbank’s experts expect stronger growth rates of 0.7 % and 1.2 % for 2026 and 2027. Compared with the December Forecast for Germany, the growth outlook is thus revised downwards for 2025 and upwards for 2027. According to the Bundesbank’s experts, the outlook is clouded in the short term by the protectionist trade policy of the United States and the associated uncertainty. Overall, exports will decline significantly in 2025 and increase only slightly next year. Reduced momentum in industrial production due to tariffs will contribute to a slowdown in the labour market and weigh on wage growth. From 2026 onwards, the expansionary fiscal policy and the lessened growth-dampening impact of US economic policy will lead to a marked recovery for the German economy.

Following the easing of the debt brake, fiscal policymakers are financing a substantial portion of spending, particularly on defence and government infrastructure, via loans. Government consumption and, above all, government investment will therefore rise steeply from 2026 onwards. We expect the additional government spending on defence and infrastructure to significantly increase GDP growth by the end of 2027, said Bundesbank President Nagel.

Although the government deficit ratio is likely to decline further this year, it will then rise sharply to just over 4 % by 2027. The significant increase is largely attributable to the fiscal package, which includes not only higher spending on defence and government infrastructure, but also tax cuts, increased subsidies and transfers to enterprises and households. The Maastricht debt ratio will rise to around 66 % by 2027. It had already reached 62.5 % at the end of 2024. Germany’s public finances can cope with a temporary increase in the deficit and debt ratios, Mr Nagel said.

The rise in inflation as measured by the Harmonised Index of Consumer Prices (HICP) will slow to 2.2 % as an annual average in 2025. Inflation is then likely to decline temporarily to 1.5 % in 2026 due to energy prices, before rising again to 1.9 % in 2027. The core rate (excluding energy and food) will fall to 2.6 % this year and thus remain markedly higher. It will then fall to 1.9 % in 2026. From 2026 onwards, the core rate will settle at around 2 %,” Bundesbank President Nagel said. The reasons for this decline are the decreasing price pressures from labour costs and the initially still weak demand. We’re also seeing the delayed effect of the Eurosystem’s tight monetary policy up to 2024.

Projection June 2025