After two years of contraction, the economy is set to broadly stagnate in 2025 and rebound with 1.2% GDP growth in 2026 and 2027. The positive effects of a ramp-up in public spending is partly counterbalanced by the negative impact of trade tensions, which are expected to impact exports. Expansionary fiscal policy and real wage growth are expected to boost private consumption. Investment is projected to contract in 2025 due to weak economic sentiment and high uncertainty, with a gradual recovery expected over time as consumption and public investment accelerate. The government deficit is forecast to rise in 2026 and – based on currently known policies – remain elevated in 2027. The government debt ratio is expected to increase to 65.2% of GDP in 2026 and 67.0% in 2027.
| Indicators | 2025 | 2026 | 2027 |
|---|---|---|---|
| GDP growth (%, yoy) | 0.2 | 1.2 | 1.2 |
| Inflation (%, yoy) | 2.3 | 2.2 | 1.9 |
| Unemployment (%) | 3.6 | 3.5 | 3.3 |
| General government balance (% of GDP) | -3.1 | -4.0 | -3.8 |
| Gross public debt (% of GDP) | 63.5 | 65.2 | 67.0 |
| Current account balance (% of GDP) | 4.8 | 4.2 | 3.6 |
Economic activity is set to recover in 2026
Germany has gone through a prolonged period of economic stagnation. Since the COVID-19 pandemic, it has recorded one of the weakest recoveries among advanced economies and real GDP in 2024 was reported to be roughly at its 2019 level. The economy stagnated during the first half of 2025. In 2024, exports fell by 2.1%, reflecting a continued loss of export market shares, notably vis-à-vis China. In 2025-Q1, exports grew strongly as the announcement of an increase in US tariffs led to a frontloading of exports to the US. This effect has started to reverse following the decrease in exports that began in 2025-Q2. High levels of uncertainty and relatively tight financing conditions continued to dampen equipment investment in 2024 and early 2025. Growth in private consumption began to improve in late 2024 and early 2025, setting the scene for a gradual recovery from late 2025 onward.
In 2025 and 2026, tariffs and high global uncertainty are expected to continue weighing on investment and exports. However, these effects are counterbalanced by higher public spending, which will support consumption and overall investment particularly in 2026 and 2027.
Moreover, lower inflation is set to support real household incomes and sustain private consumption growth. The high savings rate is forecast to decline gradually. Robust growth in public investment, along with generally looser fiscal policy, is projected to underpin the recovery in corporates’ equipment investment in 2026. Residential construction activity is expected to begin recovering from 2026 onwards, as indicated by the increase in building permits and orders. Public investment growth is driving a turnaround in non-residential construction starting in 2025. By contrast, exports are projected to keep weighing on growth for the third consecutive year. Tariffs and high geopolitical and trade policy uncertainty deepen the challenges faced by key export-oriented industries. Overall, net exports are projected to contract by 0.2% this year and recover as from mid-2026. The current account surplus is forecast to remain well below 5%, as exports weaken and imports increase, driven by higher domestic demand and relatively cheaper imports.
Real GDP is set to broadly stagnate in 2025 and then return to growth at 1.2% in 2026 and 2027.
Economic difficulties have resulted in labour market stagnation
As output contracted, labour demand decreased. The unemployment rate is set to rise to 3.6% in 2025 before decreasing to 3.3% by 2027. Job vacancies in 2025-Q2 stood at 1.06 million, half their 2022 peak. Nevertheless, around 27% of firms reported labour shortages in early 2025. The labour market is set to remain tight, as population ageing leads to a stagnant labour force and broadly constant employment over the forecast horizon. Job losses in manufacturing are expected to be offset by gains in public services, such as education and health. With inflation slowing and announced minimum wage increases of 8.5% in 2026 and 5% in 2027, real wages are set to rise.
Inflation continues to abate
After easing to 2.5% in 2024, HICP inflation is projected to decline to 2.3% in 2025, 2.1% in 2026, and 1.9% in 2027. The marked fall in wholesale energy prices in early 2025 is expected to have a disinflationary effect on retail energy prices over the forecast horizon. In 2027, if the European Emissions Trading System 2 is introduced, energy price inflation may decline further, as the CO₂ price is expected to be lower than under the current national scheme. At the same time, continued nominal wage growth contributes to the persistence of services inflation.
Fiscal policy turns expansionary
In March 2025, the German parliament adopted a fiscal policy reform that exempts all defence spending above 1% of GDP from national fiscal rules, allows for the creation of a EUR 500 billion special fund for infrastructure and climate investment, and loosens spending rules for the Federal States (Länder). The 2025 and 2026 federal budgets reflect the additional fiscal space granted by the reform.
Public spending is set to rise significantly in 2025 and 2026. The general government deficit is projected to increase from 2.7% in 2024 to 3.1% of GDP in 2025 and 4.0% in 2026, driven by accelerated investment and defence-oriented spending. The fiscal stance will become significantly expansionary in 2026, also due to new tax relief measures such as higher tax deduction for firms and diverse alleviations for households. In addition, demographic ageing will keep social costs structurally elevated. In 2027, the deficit is projected to decline slightly to 3.8%. Government debt stood at 62.2% of GDP in 2024 and is expected to increase to 63.5% in 2025, 65.2% in 2026 and 67.0% in 2027.