The German government has revised its economic outlook, anticipating a higher rate of growth for 2026 and 2027 than previously expected. According to the latest projections presented in Berlin, Germany's gross domestic product (GDP) is forecast to increase by 1.3 percent in 2026 and by 1.4 percent in 2027. This marks an improvement over earlier estimates and aligns with the assessments made by leading economic research institutes.

The projected expansion follows a period of modest growth, with the economy expected to grow by just 0.2 percent in the current year. The government's new forecast suggests a gradual recovery, largely attributed to increased domestic activity and substantial public sector investments.

State Spending Drives Growth

Much of the anticipated economic momentum is expected to be generated by government spending, particularly through major investments in infrastructure and defense. Earlier this year, the federal government established a special fund amounting to 500 billion euros, accompanied by significantly expanded borrowing for defense purposes. Officials indicated that the impact of this special fund could account for up to two-thirds of the growth in 2026 and one-third in 2027, especially benefiting sectors such as construction.

Private consumption is also set to contribute positively to economic growth. Inflation rates are projected to remain near the European Central Bank's target of two percent, and rising wages--particularly among lower income groups--are expected to support household spending. However, external trade is likely to exert a dampening effect due to challenging global economic conditions, increased competition from China, and new tariffs imposed by the United States.

Concerns Over Long-Term Growth Potential

Despite the improved short-term outlook, the government expressed concerns over the long-term growth capacity of the German economy. Structural challenges, such as high energy costs, increased social spending relative to the federal budget, and a declining share of investment, were highlighted as key issues. Furthermore, demographic trends are reducing the available workforce: while in 1960 five working individuals supported one retiree, today the ratio has fallen to 2.5 and is expected to reach two by 2035.

These factors have led to a notable reduction in Germany's growth potential. Over the past decade, the economy's maximum sustainable growth rate was estimated at 1.5 percent, but current estimates suggest it has dropped to just 0.5 percent. This underscores the urgency for comprehensive structural reforms.

Government Emphasizes Reform Agenda

In response to these challenges, the government has outlined a range of policy priorities aimed at revitalizing long-term growth. Key measures under consideration include reducing energy costs, encouraging private investment, addressing the relatively high tax and social security burden, cutting bureaucracy, liberalizing markets, and fostering innovation.

Economic advisors have proposed more far-reaching reforms, such as phasing out early retirement options and raising the statutory retirement age to address demographic pressures. While these specific proposals have not yet been officially endorsed, the government emphasized the importance of strengthening private retirement savings as part of a broader reform strategy.

Officials acknowledge that the primary challenge lies not in recognizing these issues but in implementing effective solutions. The government intends to address these structural concerns through sustained efforts in the coming months and years.