German Economy Gradually Emerging from Prolonged Downturn

The German economy, after enduring three years of stagnation, is forecasted to see gradual improvement in 2026. Economic projections from major institutions such as the Bundesbank and the German Institute for Economic Research (DIW) suggest that the recovery remains fragile, with notable growth expected only in the medium term.

Recent analyses indicate that consumer confidence remains subdued, while labor market prospects are uncertain. Despite these challenges, leading economic experts anticipate positive momentum beginning in 2026, driven by increased government spending and a tentative revival in exports. The Bundesbank now estimates a 0.6 percent increase in Germany's real gross domestic product (GDP) for 2026, a slight downgrade from previous expectations. Factoring in calendar effects due to a greater number of working days, the DIW forecasts a 1.3 percent GDP growth for 2026, rising to 1.6 percent in 2027.

According to official projections, economic activity is expected to pick up moderately in the first half of 2026, with stronger growth anticipated from the second quarter onward. This uptick is attributed largely to increased government expenditure on infrastructure and defense projects, alongside mildly improving export conditions. However, persistent international trade barriers, including higher tariffs from the United States and ongoing disputes over raw materials with China, continue to weigh on Germany's export sector. The DIW notes that demand from key international markets, especially non-European countries, remains sluggish, limiting immediate prospects for export-driven expansion.

Looking ahead to 2027, the Bundesbank predicts that the German economy will expand by 1.3 percent, with further growth of 1.1 percent projected for 2028. This anticipated acceleration is largely contingent on the impact of extensive government investment programs, estimated at around 500 billion euros, targeting improvements in transportation networks and enhancing national defense capabilities. Nevertheless, these measures are not expected to fully offset structural challenges in the labor market. According to recent findings from the Ifo Institute, a significant proportion of industrial sectors are planning continued workforce reductions in the near future, reflecting ongoing economic softness.

Consumer spending, a crucial pillar of domestic economic activity, is currently hampered by widespread concerns about personal income and job security. Surveys by market research firms, including GfK and NIM, reveal that German consumers are increasingly prioritizing savings, leading to one of the lowest levels of purchasing sentiment in recent months. Despite this, the Bundesbank remains optimistic that rising wages and a gradually improving employment landscape will eventually support real incomes and stimulate household consumption.

Inflation remains a persistent issue for German households. The Bundesbank projects that the rate of price increases will decline only slowly, with inflation expected to remain above the European Central Bank's two percent target in the near term. After an inflation rate of 2.3 percent this year, estimates point to a rate of 2.2 percent in 2026, easing to 2.1 percent in 2027 and 1.9 percent in 2028. Elevated inflation continues to erode consumer purchasing power, making goods and services less affordable for many households.

In summary, while the German economy is showing early signs of recovery after several years of stagnation, the pace of growth is expected to remain moderate in the short term. Government investment and improving labor market conditions are forecasted to provide gradual support, but external risks and domestic uncertainties persist. The outlook suggests that a more robust economic upswing may not materialize until 2027, as policy measures and global conditions align to foster sustained growth.