Economic forecast for Germany: Expansionary fiscal policy masks structural weakness

After a prolonged period of stagnation, the German economy is showing early signs of recovery, according to the Autumn 2025 Joint Economic Forecast published today by a consortium of leading research institutes. The group predicts a modest GDP growth of 0.2 percent for 2025, followed by a more noticeable acceleration to 1.3 percent in 2026 and 1.4 percent in 2027, supported largely by an expansionary fiscal policy.

“Germany’s economy is still on shaky ground,” said Geraldine Dany-Knedlik, head of forecasting and economic policy at DIW Berlin. “We are seeing signs of a recovery over the next two years, but given the persistent structural weaknesses, this momentum is unlikely to be sustained.”

The German government is taking advantage of relaxed borrowing rules to finance defense, infrastructure, and climate-related investments. While this provides short-term economic stimulus, the institutes warn of key limitations. Many projects, especially in construction and defense, are subject to long lead times and bureaucratic delays. In addition, new borrowing is partially being used to avoid fiscal consolidation. By 2027, a significant budget adjustment will be required, despite the carryover of credit authorizations.

Structural weaknesses remain unresolved

While domestic demand is expected to improve, the report cautions that the underlying economic problems are merely being masked, not solved. The forecast highlights weak structural reforms and declining business confidence, pointing to a long-term slowdown in potential output growth. Germany continues to struggle with high energy and labor costs, a shortage of skilled workers, and diminishing international competitiveness.

Service sectors, especially in the public domain, are projected to grow strongly in the coming two years. However, the recovery in manufacturing is likely to be subdued due to weak international demand for German goods. Export growth, traditionally a major driver of the German economy, is expected to remain muted, reflecting both higher global tariffs and eroding price competitiveness.

Labour market to benefit from mild upturn

The anticipated economic rebound is expected to have a positive impact on the labour market. Rising real disposable incomes are likely to boost private consumption, with consumer-oriented services benefitting in particular. Inflation is projected to average just above two percent during the forecast period.

Still, the outlook is marked by significant risks. The ongoing trade dispute between the EU and the United States has the potential to escalate, especially if Brussels fails to meet recent commitments. Moreover, the macroeconomic effects of Germany’s fiscal stimulus remain uncertain and will depend heavily on how policies are implemented.

Source: DIW Berlin