The IfW Kiel Institute has published its latest projections for the German economy. It predicts stagnation in 2025, consistent with earlier forecasts.
For 2026, growth is anticipated to reach 1.5%, an increase from the previously estimated 0.9%. This revision is largely attributed to expected rises in government spending, particularly in defence and infrastructure as the new administration plans to boost expenditures.
Economic Outlook For Germany
The latest projections from the IfW Kiel Institute suggest that the German economy will remain flat next year, continuing a period of weak expansion. This aligns with earlier assessments that pointed to subdued industrial activity and restrained consumer spending. However, the outlook for 2026 has improved, with expectations of a 1.5% rise in output, up from an earlier estimate of 0.9%. The upward revision is largely due to anticipated increases in government expenditure, particularly in defence and infrastructure projects, as policymakers adjust fiscal priorities.
Labour market conditions will play a role in shaping this trajectory. While unemployment is not forecast to rise sharply, sluggish job creation could limit household incomes, constraining demand. At the same time, businesses face ongoing pressure from rising costs and regulatory changes, which may dampen investment plans despite improved public sector outlays.
Inflation remains a factor that warrants close attention. Although the pace of price increases has moderated from previous highs, persistent cost pressures in key sectors threaten to keep inflation above target. We see indications that central authorities are not yet ready to ease monetary policy, as inflation expectations remain unstable. Borrowing costs are likely to stay elevated longer than some market participants anticipated earlier this year.
External trade remains a critical element in this broader picture. Global demand for German exports has yet to show a sustained rebound, with uncertainties around supply chains and geopolitical risks weighing on confidence. The expected rise in government investment may help offset some of this weakness, but it is unlikely to fully compensate for lower demand abroad.
Fiscal Policy And Market Impact
For those assessing short-term volatility, shifts in sentiment around fiscal policy will be important in the weeks ahead. Recent statements from officials have reinforced that stimulus measures will be targeted and gradual, rather than broad-based injections of capital. This could lead to adjustments in market positions as expectations about growth and inflation shift in response to new data.
It is clear that while prospects for 2026 have improved, near-term conditions remain complex. Inflation trends, policy decisions, and external risks will all influence how expectations develop. Understanding these factors will be key for positioning appropriately in the coming period.
