Germany Raises 2026 Growth Forecast to 1.3 Percent

The German Council of Economic Experts raised its 2026 growth forecast to 1.3 percent, up from a May estimate of 0.5 percent, citing strong exports and a recovery from energy shocks. The council also predicts 1 percent growth for 2027, though it warned that defense and retirement spending could drive budget deficits to 4.8 percent of output by 2040.

Bundesbank President Joachim Nagel reported that growth is accelerating faster than summer projections and is likely to pick up further in the fourth quarter of 2026. This recovery is driven by increased government spending on infrastructure and defense, alongside a rebound in the chemicals and electrical equipment sectors. However, Nagel noted that the recovery is not yet broad-based, as private consumption remains subdued and machinery investment has declined.

Chancellor Friedrich Merz welcomed the economic signs and pledged structural reforms to the pension system to protect public finances and the nation's AAA credit rating. Finance Minister Lars Klingbeil stated that cost-cutting measures have already closed a 34 billion euro gap in the 2027 budget, which the Bundestag is scheduled to finalize this Thursday.

Despite the short-term upturn, officials warned of deep structural challenges. Nagel cited a shrinking working-age population and productivity issues that keep Germany's potential growth rate between 0.3 percent and 0.4 percent, arguing that public spending alone cannot sustain long-term expansion.