Key facts
- Germany's GDP is forecast to grow 1.3% in 2026 and 1.1% in 2027.
- Growth is expected to slow to 0.4% in 2028 due to demographic challenges.
- Inflation is projected to reach 2.8% this year, rising to 3.2% in 2027 before easing to 2.0% in 2028.
- The government's deficit is set to rise from 4.1% of GDP this year to 4.7% in 2028.
- The AfD party won first place in two regional elections in eastern Germany this month.
Germany's leading economic institutes have significantly raised their growth forecasts for Europe's largest economy, projecting GDP to grow 1.3% in 2026 and 1.1% in 2027, with a slowdown to 0.4% in 2028. This provides unexpected relief for Chancellor Friedrich Merz, who has faced mounting political pressure over the economy.
The improved outlook is attributed to stronger global demand, a boom in artificial intelligence, and rising government spending, which have boosted exports and manufacturing. However, economists cautioned that the recovery is on a narrow foundation, citing high energy prices and structural problems, including demographic decline.
Economists warned that domestic political developments could further weaken the outlook. They noted that the German coalition government is reportedly backpedaling on necessary but unpopular reforms to the healthcare and pension systems following significant wins by the far-right Alternative for Germany (AfD) party in recent regional elections. This inconsistency in policy could deter investors, leading to a "wait-and-see attitude."
Private consumption and business investment remain weak due to high energy prices impacting household purchasing power. Inflation is projected to be 2.8% this year, rising to 3.2% in 2027 before easing to 2.0% in 2028. Additionally, rising German borrowing risks creating instability in the eurozone, with the government's deficit projected to increase from 4.1% of GDP this year to 4.7% in 2028.