Despite a series of shocks, Germany is set for a sharp acceleration in growth in 2026. This wouldn’t mark the first time: in 2025 already, Germany emerged from recession. Growth remained modest, yet noteworthy in a climate disrupted by US tariffs.
According to our current forecasts, growth is set to more than double in 2026 and strengthen further in 2027, despite the impact of the conflict in the Middle East. It would be supported by the ramp-up of the large-scale investment plans launched last year. The first figures of the year are already encouraging: between January and April, federal spending reached 4.7% of GDP, equivalent to one third of its annual target. Investment spending accounted for 0.4% of GDP, and defence spending for 0.6%. These figures suggest that the German government is on track to meet its 2026 budget goals.
If Germany is expected to see growth accelerate, it is also because it appears better equipped to deal with the consequences of the conflict in the Middle East than it was when the war in Ukraine broke out. Germany’s energy mix has evolved : renewable energy production has increased, reducing reliance on gas for power generation, and making the economy less vulnerable to today’s energy shock than it was in 2022.
A prolonged conflict, however, remains a risk. Our baseline scenario assumes a gradual normalisation, with oil prices easing to around 80 USD a barrel in the second half of the year. A more sustained period at a higher level would inevitably weigh on the German economy, which remains energy-intensive, both in sectors supported by the investment plans and in traditional industrial pillars such as chemicals.
Germany’s main challenge comes from China. According to a recent Centre for European Reform study, Germany is the European country most exposed to the China shock. Its key industries—automotive, machinery and chemicals— are facing intensifying competition, not only in China but also in third markets and even at home. In 2025, China overtook the United States as the top foreign investor in Germany, with announced projects up 15% year-on-year.
Against this backdrop, the German economy is accelerating its transformation. Exports to the euro area are partly offsetting weaker demand from China and the United States. Industry is shifting towards defence, aerospace and electronic equipment—sectors that already account for 15% of industrial output. Germany’s Mittelstand is also benefiting from investment cycles linked to electrification and AI.
Yet this transformation hinges on upgrading innovation policy. Further efforts in research and development will be essential to reap the full benefits of current investments and to strengthen Germany’s chances of once again becoming one of the engines of European growth.
