The German economy has been in a phase of recovery since the end of 2025. This upturn has developed more dynamically than initially assumed in the spring, although it still shows moderate indicators. Leading economic research institutes are forecasting a 1.3 per cent increase in gross domestic product for the current year. For the two subsequent years, 2027 and 2028, increases of 1.1 per cent and 0.4 per cent respectively are expected. These estimates represent an upward revision of forecasts compared to the spring, specifically by 0.7 percentage points for 2026 and 0.2 percentage points for 2027.
Oliver Holtemöller, Head of Macroeconomics at the Leibniz Institute for Economic Research Halle (IWH), notes that the economy has proven more robust than expected. However, he stresses that the current upturn rests on a narrow foundation, as high energy prices and existing structural problems continue to be a burden. Temporary constraints, such as low water levels in the current quarter, have also hampered economic activity. Concurrently, a growing government deficit is evident, implying an increasing need for consolidation.
Factors of Economic Momentum
In the first half of 2026, the German economy showed significantly stronger development. The export economy and value creation in the manufacturing sector, in particular, recorded surprisingly strong gains. Key impetus for this resulted from robust global economic activity and the worldwide AI boom. In parallel, competitors from the Gulf region experienced significant production disruptions due to the Iran War, which indirectly strengthened Germany's export position. Government spending also increased significantly. In contrast, corporate investment and private consumption remained subdued.
Although the energy price shock associated with the Iran War slowed the German economy, the increased prices for fuels and heating oil have so far shown only minor effects on other consumer prices. In the third quarter, the recovery temporarily decelerated. Although sentiment indicators continued to develop positively, current economic data proved weaker. The low water levels persisting since mid-July particularly affected production in the chemical industry. Higher energy prices also reduce purchasing power and thus private consumption. For the third quarter, a GDP growth of only 0.1 per cent compared to the previous quarter is expected. With a normalisation of water levels, production bottlenecks are expected to ease from the fourth quarter onwards.
Outlook and Structural Challenges
For 2027, the institutes forecast a continuation of the upturn, primarily driven by domestic demand. Private consumption is likely to increase moderately due to real rising incomes, and residential construction investments are expected to gradually pick up. However, overall private investment activity is assessed as weak. In 2028, a slowdown in expansion is anticipated. At this point, structural limits to the upturn are increasingly emerging. The potential workforce is shrinking due to demographic changes, and potential growth continues to decline. Therefore, even small growth rates will suffice in the future to utilise overall economic capacities.
Regarding inflation, an increase from 2.8 per cent in the current year to 3.2 per cent in 2027 is expected, followed by a decline to 2.0 per cent in 2028. Recovery in the labour market is delayed. Employment will initially continue to fall, while the unemployment rate will decrease from 6.4 per cent in 2026 to 6.2 per cent in the following year and 5.8 per cent in 2028. The institutes see an increasing need for action in fiscal policy. The government's financial deficit will rise from 4.1 per cent in relation to GDP in the current year to 4.7 per cent in 2028. The growth in net primary expenditure is likely to significantly exceed the path defined in the European framework. Even if the reformed national debt brake is observed, the debt ratio will continue to increase in the medium term, while interest expenses will rise considerably. This intensifies the need for consolidation.
