Germany’s primary deficit is expected to widen significantly in 2026 and 2027. Having benefited from nominal growth that was significantly higher than the apparent interest rate on its debt, Germany is expected to see this situation reverse from 2030 onwards. Driven by infrastructure investment and increased defence spending, primary public expenditure (excluding interest) is expected to rise sharply from 2026 onwards.
The significant increase in business creations since mid-2025 in the United States, France and Germany – and, to a lesser extent, in the United Kingdom – is continuing. Across the board, this trend is being driven by the information and communication sector and mostly by AI. It is spreading to other business services, while developments in consumer services, industry and construction are more mixed. However, in both the United States and France, the trend is broadening, suggesting that AI is facilitating business creation across all sectors.
Growth looks to have held up in Q3 despite successive shocks, as it did in 2025 and H1 2026. A longer Middle East conflict has fed into more persistent inflation; drought has worsened in many countries, and interest rates have risen further – at the short end, with both the ECB and the Fed raising policy rates in September, and even more at the long end. However, our nowcasts show that growth is bending without breaking in most advanced economies.
The 2022 energy crisis clearly highlighted the issue of electricity prices in Europe – and, more broadly, the issue of energy prices. As a result, European manufacturers’ competitiveness has been severely undermined when compared with the United States and China. By reigniting tensions over electricity prices, the conflict that began in the Middle East in late February 2026 further underscores the continent’s vulnerability to fossil fuel imports, despite the expansion of renewable energy. Faced with an environment of potential sharp and sudden price rises, European governments do not have the same room for manoeuvre.
GDP growth is proving more resilient to shocks than anticipated. Second-quarter figures confirm this trend: despite rising oil prices, growth remains supported by various reflationary forces. At the heart of this cycle lies a clear driver: Artificial Intelligence (AI). Consequently, major global economies are ramping up investment in capital goods.
Growth, which began in the fourth quarter of 2025, gained momentum in the first half of 2026. This momentum should continue, with expected growth of 1.1% in 2026 and 1.3% in 2027. In the short term, the main driver will still be exports, particularly to Europe, which will contribute to restructuring industry. The impact of investment plans is expected to strengthen in 2027, while domestic demand is likely to remain constrained by inflation (2.7 % in 2026 and 2.6 % in 2027), which will weigh on purchasing power. Fiscal stimulus and structural reforms are expected to continue to support growth. However, the rise in the deficit and debt levels means that the increase in long-term interest rates observed so far is mostly structural.
Statistical agencies often revise growth figures a posteriori, and generally upwards. But this takes time, as their data often become more comprehensive and accurate after two years. France is seeing the largest upward revisions over this timeframe, and, generally, these revisions are more pronounced in Europe than in the United States.
Over a year has passed since the German government announced substantial investment plans in defence and infrastructure. As we assess the situation in mid 2026, the implementation of these plans is progressing as we had anticipated. However, the current impact of these investments on growth is proving to be more subdued than expected (notably because a portion of the infrastructure funds has been used to finance government current expenditure). Nonetheless, the rebound in industrial orders is becoming evident, and the increase in intra European trade directed towards Germany indicates that a positive momentum is developing.
Despite the energy shock caused by the conflict in the Middle East and intensifying competition from China, Germany is set to accelerate its growth in 2026 and 2027, driven by massive investment efforts. Yet its reliance on traditional industries and high exposure to China pose structural challenges that will require heightened innovation efforts.
Advanced economies proved resilient in 2025 despite a tariff shock that disrupted global trade. By early 2026, they were on track for faster growth and lower inflation. A fresh shock linked to the war in the Middle East, however, is reigniting inflation while slowing growth. This mix primarily reflects the impact of a likely decline in purchasing power on consumer spending. However, many of the factors that underpinned 2025 growth — AI development, higher defense spending (especially in Europe), and continued trade growth — are set to persist in 2026. They would be reinforced by an acceleration of electrification, against a backdrop of rising oil prices and an AI-driven rise in electricity demand.
After two years of recession, German growth began to recover in 2025. We expect it to strengthen in 2026, driven by the ramp-up of investment plans. We are, however, revising our forecasts downwards, as the German economy remains vulnerable to the current shock to energy prices (+0.8% in 2026 [-0.6pp] and +1.1% in 2027 [-0.4pp]). This will weigh on private consumption due to the impact of rising inflation (3.2% in 2026 [+1.6pp] et +3.5% in 2027 [+1.2pp]) on the purchasing power of wages. The fiscal trajectory, meanwhile, is expected to remain broadly unchanged. Public debt is set to continue rising towards 70% of GDP by 2030, which, in the current context, would maintain upward pressure on long-term interest rates.
The energy shock has mainly resulted in precautionary behaviour on the part of firms, which increased their inventories in March. This reflects the sharp rise in input costs (which are still below their 2022 levels, however). In the short term, the build-up of corporate inventories (prior to the acceleration in inflation) has supported production. The rise in energy prices does not appear, at this stage, to have affected household spending behaviour.
After two quarters of contraction, German industrial output rose by +0.9 % q/q in Q4, despite a December decline (-1.9 % m/m). That decline, driven mainly by the automotive sector, hides ongoing improvements in most other parts of the industry. Those gains are expected to deepen in coming months thanks to a sharp rebound in new orders for capital goods. We see this as signaling the start of a fresh industrial cycle that is increasingly powered by domestic demand. At the same time, a recovery in exports is starting to take shape, with a solid December figure and a pickup in new foreign orders - though the rebound is not as strong as on the home front.
The industrial recession ended in Q4 2025 in Germany. Production rebounded, driven by capital goods, as did demand (new industrial orders). However, the business climate remains mixed.
March 4 will mark the first anniversary of Germany's announcement of its plans for massive investments in defense and infrastructure. The increase in public spending in Germany has already contributed to end the two-year recession (2023-2024) by 2025 – mainly through defense investments, according to our estimates. Infrastructure investments, on the other hand, are currently below the planned amounts. 2026, however, is expected to see a clear acceleration of these programmes, which should bolster a strong pickup in growth and restore Germany’s role as a driving force in the euro area.
The German economy is undergoing a strategic transformation, with increased public spending poised to significantly change its economic model. This transformation has the potential to boost business investment and household spending, while also reducing the country's reliance on exports. The stability of GDP in Q3 2025 underscores this duality: the rise in public spending and private investment is offsetting the ongoing decline in exports. Following a growth rate of 0.3% in 2025, Germany's economic expansion is projected to gain considerable momentum in 2026 (1.4%) and 2027 (1.5%), with this growth gradually extending to the private sector. The rise in public debt is expected to remain manageable and temporary
Germany's primary deficit is expected to widen over the next two years as a result of the new fiscal strategy, before gradually narrowing between now and 2030.
The decline in the IFO index in September does not impede the upward trend that began in early 2025. The relative weakness in September particularly affected services and retail trade. However, there has been a clear improvement since the beginning of the year in German industry, construction and wholesale trade. This momentum has not yet spread to the rest of the economy, whilst awaiting the effective implementation of investment plans, with a ramp-up expected in Q4.
The IFO business climate index fell in September to 87.7 from 88.9 in August (-1.2 points month-on-month, a monthly change close to the historical average monthly change of 1.1 points in absolute terms). This deterioration, after eight consecutive months of growth (84.8 in December 2024), particularly affected services. The situation in industry remained stable and more favourable than at the end of 2024, with a gain of around ten points for both current activity and the outlook.
The resumption of German growth has been hampered by US tariffs. However, the outlook continues to brighten thanks to the government's strategy, which is structured around a vast programme of public investment and incentives for business investment. Beyond the anticipated economic rebound, the structural recovery of growth will depend on the country's ability to control its value chains and reposition itself in global trade amid increased competition. Inflation is expected to continue to decline. Despite unfavourable developments in industry, unemployment remains contained, and labour market tensions could quickly resurface. Public debt is expected to grow as a result of the widening budget deficit and rising interest rates (the effects of which will be felt by other Eurozone members).
The IFO business climate continues to improve (+0.9 points in June compared to the previous month, to 88.4), supported by favourable economic prospects. The early measures taken by the Merz government (enhanced depreciation allowances for investments, an ambitious budget for public investment until 2025 and a commitment to reduce energy costs for businesses) are fuelling high expectations. These are also reflected in the PMI index, which is picking up in both the manufacturing and services sectors.
The German government has presented its draft budget for 2025, which is expected to be adopted in September. It is a breakaway budget marked by a clear return to public investment and support for business investment, at the cost of a significant increase in debt. This budget is one of the pillars of Germany's new policy, which should have a rapid positive impact on growth.
Business climate: better prospects. According to the Ifo survey, the business climate continued to improve in May (+0.6 points m/m to 87.5), driven by the improvement in the economic outlook (+1.5 points). The services index declined for the second consecutive month, while the manufacturing sector continued to show signs of improvement. Nevertheless, the index remains below its long-term average (95.6), signaling a fragile recovery amid high uncertainty.
The business climate remains fragile. The IFO index has been rising since the beginning of 2025, including in April (86.9, +0.2 pp m/m, historical average of 95.7). However, the economic outlook has darkened as a result of the trade tensions triggered by the protectionist shift in the United States. These tensions have now spread to the services sector (flash PMI down to 48.8 in April). Industry is showing signs of stabilisation, but the situation remains fragile.
Against a backdrop of heightened international competition and trade tensions linked to the United States' new tariff policy, the German economy is seeing its traditional growth drivers challenged. In the short term, the increase in customs duties imposed by the Trump administration will weigh on exports and heighten economic uncertainty.
The Federal Republic of Germany is a parliamentary republic headed by a chancellor and a president. It comprises sixteen states (Bundesländer). Each state has its own state constitution, and is largely autonomous concerning its internal organisation. The most prosperous states are Bayern and Baden Württemberg in the southern part of the country. GDP per capita in these states are about 15% higher than the German average. The dynamism of the area is largely due to its sector specialisation. Manufacturing production makes up around 30% of production, and is concentrated in hi-tech industries.
With 83 million inhabitants the Federal Republic of Germany is the leading economy in the Eurozone both in population terms and its share of Eurozone GDP (more than one third). GDP per head is 20% above the Eurozone average, making it one of the most prosperous Eurozone countries. Germany is the world’s fourth largest economic power after the US, Japan and China, and the third largest exporter after China and the US.
The manufacturing sector plays a vital role in the economy. It accounts for almost 20% of employment and contributes almost a quarter of total value added. However, industry’s central role makes Germany’s economy more cyclical than some of its neighbours
