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.
A return to growth driven by external trade
The first half of 2026 confirms the rebound in growth (0.4% and then 0.3% q/q in Q1 and Q2). This growth is driven by foreign trade (contributions from net exports of +0.8 pp and +0.2 pp, respectively, with +0.9 pp on average coming from exports and -0.4 pp from imports), following two years of contracting exports, particularly those to Europe (see below). The increase in public expenditure (see our analysis) reflects the implementation of investment plans, with the multiplier effect on growth of these plans expected to increase.
Growth and inflationIn the second half of the year, growth is expected to remain robust, pushing the annual average to 1.1% in 2026 (following 0.3% in 2025). Exports are set to remain the main driver, thanks to continued strong European demand, which is compensating for domestic demand that remains sluggish. Growth of private consumption will, in fact, remain subdued by energy inflation. Business investment is expected to be driven by dynamic sectors (defence, technology equipment and aerospace), which would limit the impact of rising interest rates.
In 2027, growth (1.3%) would be based more heavily on domestic demand, with greater spillover effects from investment plans and a likely recovery in household consumption (following a peak in inflation in Q1 2027). At the same time, external demand is expected to remain strong, but its contribution to growth would be lower than in 2026. This is because the stronger growth in domestic demand would stimulate imports to a greater extent.
Industry is benefiting from AI investment and intra-European momentum
The business climate in industry improved significantly at the start of the second half of the year (the manufacturing PMI has risen by 4 points since May, reaching a four-year high in August). New export orders have even reached their highest level since early 2022. These positive signs put into perspective the risks associated with the summer’s climate events (heatwaves and the historic drought on the Rhine), which disrupted industrial activity and river transport.
Since early 2025, output in some sectors has rebounded, particularly in the electronics sector (+6.4 %). Manufacturers of electrical equipment, as well as IT and electronics firms, are benefiting in particular from the wave of investment in data centres and defence. If this momentum continues, it could offset some of the losses recorded in the automotive and chemicals sectors, which have both seen the sharpest falls in output since late 2017 (-12.8% and -19.4%, respectively).
Industry is restructuring and benefting from investment in AI and defenceThe sustained increase in military spending on medical technologies and robotics across Europe is driving a restructuring of the intermediate-goods sector. Companies exposed to struggling sectors are gradually turning towards these new markets. However, this reorientation is not fully offsetting the loss of historical markets.
The intra-European reorientation of German exports is underwayThe rebound in German industry is also being fuelled by European demand. While exports to China (-12.7% YTD in July) and the United States (-1.5%) have certainly continued to fall, exports to a number of European Union countries have risen sharply, particularly in Southern and Central Europe. This shift is benefiting machinery and transport equipment (47.6%of goods exports, up 20.5%since January 2025) in particular. We expect this momentum to continue in 2027, creating a virtuous cycle that reinforces European growth.
A stagnant labour market
The situation in the German labour market has stabilised over the past several quarters, but it is not yet showing signs of improvement. The unemployment rate is shifting relatively little (4% in November; +0.2 pp y/y) and remains below the eurozone average (6.4%). Falling employment in the manufacturing sector (-0.6% since Q4 2019) is offset by an increase in the services sector (+0.9%). Nevertheless, the latest business climate surveys suggest that the situation may stabilise. The gradual retraining of the workforce in struggling sectors is helping to meet some of the needs arising from new investment. Generally speaking, in the longer term, pension reform should support the labour supply. As a matter of fact, it will help to increase the number of workers gradually, notably throughthe phasing out of early retirement at 63 and the indexing of the retirement age to life expectancy from 2032 onwards.
Although the unemployment rate is set to remain low, wage growth would remain limited, particularly in 2026, as negotiated wages will offset inflation to a lesser extent than they will in 2027. The planned increases in the minimum wage (+8% in 2026 and +5%in 2027, to EUR 14.6 per hour), significant as they are, will have little knock-on effect on the rest of the wage scale.
Purchasing power continues to be squeezed by high inflation
Wage purchasing power is expected to fall further in 2026, having already lost 4 pp since 2022, before stabilising in 2027. The reduction in income tax (by EUR 10 billion, or 0.2% of GDP), which will come into force next January, is also expected to support the disposable income of low- and middle-income households.
Inflation has been rising again since the start of the summer and is expected to remain above 2%throughout our forecast horizon. It has accelerated since June (+0.5 pp to +2.9% y/yin August) driven by a further rise in energy prices (+6.7 pp to +9.4% y/y), while core inflation remains stable at +2.6%. From spring 2027 onwards, the expected easing in energy prices (particularly gas prices) should bring down inflation. However, this decline will be limited by the inflationary effects of the wider roll-out of investment plans, as well as by the expected rise in food prices.
This inflation, which has been structurally higher since the onset of the 2022 energy shock, will weigh on household consumption. Furthermore, German households’ propensity to save remains high by international standards (with a net balance 15 points higher on average over the last ten years, according to the European Commission), which is also weighing on their consumption.
Fiscal stimulus continues
After recording a public deficit of -3% of GDP in 2025, we anticipate a further deterioration in the public balance to -4% in 2026, then -4.2% in 2027. The primary deficit is projected to reach -2.8% of GDP in 2026 (after -1.9% in 2025) before narrowing slightly to -2.7% in 2027. At the same time, the interest burden is expected to rise gradually from 1.1% of GDP in 2025 to 1.5% in 2027. This combination will result in a rapid rise in the debt-to-GDP ratio, from 62.6% of GDP in 2025 to 66.1% in 2026 and then 69.7% in 2027, before approaching 85% by the end of the decade.
The yield on the 10-year Bund rose above 3.5% on 14 September, its highest level since 2007. In addition to the increase in issues linked to extra-budgetary funds, inflationary pressures are also contributing to this rise. A gradual easing of inflation next year would make a moderate easing of sovereign yields possible in 2027. However, yields would remain high, at 3.2% in Q4 2027, suggesting that the bulk of the rise is structural.
At the same time, the government is continuing to implement its programme of structural reforms, including measures to support business investment, health-insurance reform, pension reform and an overhaul of the tax system. A number measures have come into force, particularly accelerated depreciation for business investment until 2027, which will be followed by a reduction in corporation tax from 2028. Administrative simplification is also set to lead to an overhaul of the tax system from January 2027[1]. The health-insurance reform has been passed, while the pension reform is still under discussion, with expectations that it will be adopted by the end of the year.
