After enduring a period of significant economic stagnation, Germany is projected to see a resurgence in growth, with leading research institutes forecasting a 1.3% expansion in 2026 and a further 1.1% increase in 2027. These projections mark a notable upward revision from forecasts made earlier in the spring.
Oliver Holtemöller of the Leibniz Institute for Economic Research in Halle attributed the improved outlook primarily to the resilience of the global economy, even amidst geopolitical tensions such as the war in the Persian Gulf. He highlighted that the global surge in artificial intelligence is providing a significant boost to German exports. Additionally, the blockade of the Strait of Hormuz has disrupted supplies from competitors, leading to increased foreign demand for German petroleum and natural gas-based chemical products. The construction of AI data centers is also driving demand for German machinery and communication services.
Government expenditure on infrastructure and defense is cited as another key factor in the current upturn. However, economists caution that this positive trend may not be sustainable. Stefan Kooths of the Kiel Institute for the World Economy (IfW) noted that growth is expected to decelerate to just 0.4% in 2028. Persistent challenges such as high energy prices, a shortage of skilled labor, an aging population, and historically low private investment are expected to dampen future momentum.
The current recovery is largely fueled by government debt. The ruling coalition, comprising the Christian Democratic Union (CDU), the Christian Social Union (CSU), and the Social Democratic Party (SPD), has committed to heavy investment in modernizing infrastructure and the Bundeswehr. While this spending is safeguarding jobs and supporting companies during a period when consumers are tightening their belts, it comes with risks. The federal deficit is projected to rise from 4.1% of GDP this year to 4.7% by 2028, increasing the interest burden on future budgets.
Demographic shifts remain one of Germany’s most pressing challenges. As baby boomers retire, the labor force is shrinking by millions, exacerbating existing skill shortages. Holtemöller criticized the political rise of the right-wing Alternative for Germany (AfD), citing studies that suggest regions with populist party representation tend to experience weaker economic growth. He emphasized that greater openness to skilled immigration is crucial.
Business leaders are calling for decisive action. Helena Melnikov, CEO of the German Chamber of Commerce and Industry, stated that companies need concrete economic policy decisions rather than ongoing debates. She advocated for cost reductions, bureaucratic streamlining, and infrastructure modernization to boost competitiveness.
The industrial sector continues to contract, with approximately 15,000 jobs lost each month, particularly affecting automotive, mechanical engineering, and metals industries. While startups in digitalization and AI have emerged, Timo Wollmershäuser of the ifo Institute in Munich pointed out that many lack financing and relocate to the United States to create value, highlighting a gap between innovation and commercialization in Germany.
Economists are also criticizing the government’s planned fuel rebate, scheduled to begin on October 1. Holtemöller described the measure as an economically counterproductive blanket handout that undermines efforts to reduce energy demand during a period of tight supply. Instead, researchers recommend reform proposals previously outlined, including capping social security contributions and strengthening incentives for older workers.
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