After two years of recession and weak growth of 0.2% in 2025, economic activity is set to expand by 0.6% in 2026 and 0.9% in 2027. The energy price shock has raised costs and prices, weighing on real incomes and profit margins, thereby slowing demand. However, the ramp-up in public spending is set to contribute positively to overall growth. Private consumption is expected to strengthen somewhat in 2027, as uncertainty subsides and sentiments improve. Investment is set to recover only gradually, largely due to the public component. The fiscal expansion expected from the implementation of the 2025 reform of the constitutional fiscal framework began slowly. The general government deficit in 2025 stood at 2.7% of GDP, unchanged from 2024. Over the forecast horizon, the deficit is expected to increase to 3.7% and 4.1%, driven by higher defence spending and public investment and tax relief measures.
| Indicators | 2025 | 2026 | 2027 |
|---|---|---|---|
| GDP growth (%, yoy) | 0.2 | 0.6 | 0.9 |
| Inflation (%, yoy) | 2.3 | 2.9 | 2.7 |
| Unemployment (%) | 3.8 | 4.0 | 3.9 |
| General government balance (% of GDP) | -2.7 | -3.7 | -4.1 |
| Gross public debt (% of GDP) | 63.5 | 65.8 | 68.0 |
| Current account balance (% of GDP) | 4.7 | 3.5 | 3.1 |
Economic growth only gradually picking up speed
Since the COVID-19 pandemic, Germany has recorded one of the weakest recoveries among advanced economies. Despite strong consumption growth, economic growth in 2025 was held back by weak exports due to competition from China as well as the impact of US tariffs. High energy prices further weighed on investment, leading to broad stagnation. Nevertheless, in late 2025 the economy began to regain momentum, supported by the ramp-up in public spending following the debt brake reform agreed after the federal elections in February 2025. This upswing has since been interrupted by the shock resulting from the conflict in the Middle East.
The sudden rise in energy-driven inflation is set to detract from real household income and weigh on consumer sentiment, dampening private consumption growth in 2026. However, stronger real wage growth and improving sentiment—as uncertainty subsides—are set to boost private consumption growth in 2027. The increase in public spending is expected to support growth in both years through public consumption, transfers to the private economy and robust growth in public investment. The tentative recovery in residential construction is likely to be delayed to the second half of 2026 due to high uncertainty, tightening financing conditions and the surge in energy prices feeding into construction costs. Exports are projected to broadly stagnate after contracting for three years in a row, as tariffs and high geopolitical uncertainty exacerbate the structural challenges faced by key export-oriented industries. The current account surplus is set to fall to well below 4% of GDP, as exports weaken and imports increase, driven by recovering domestic demand. Real GDP is forecast to grow by 0.6% in 2026 and 0.9% in 2027.
Economic stagnation and structural change are leaving their mark on the labour market
Weak GDP growth has resulted in decreasing labour demand, leading to stagnating employment growth. However, sectoral trends persist as job losses in manufacturing are expected to be offset by gains in public services, such as education and health. The unemployment rate is set to rise to 4.0% in 2026 before decreasing slightly to 3.9% in 2027. Population ageing is set to lead to a shrinking labour force. With inflation spiking in 2026, real wage growth is set to slow sharply. However, it is forecast to accelerate again in 2027, as inflation subsides and nominal wage growth picks up driven by higher inflation in 2026 feeding into higher wage agreements.
High energy prices drive inflation
After easing to 2.3% in 2025, HICP inflation is projected to spike to 2.9% in 2026 before dropping again to 2.7% in 2027. The outbreak of the conflict in the Middle East in March 2026 caused a sharp increase in fuel prices, driving energy inflation. Energy prices are expected to decrease only slightly over the forecast horizon. The reduction in taxation on fuels introduced in May 2026 for two months will provide only temporary relief. Beyond the initial impact of the energy shock, continued nominal wage growth is set to sustain services inflation.
The gap between government expenditures and revenues widens
The fiscal expansion expected from the constitutional reform in March 2025 had a slow start, with the general government deficit in 2025 remaining at the 2024 level of 2.7% of GDP. This outcome reflected lower-than-planned spending from off-budget funds due to administrative delays, including the late adoption of the 2025 federal budget and postponed transfers to the Länder. Meanwhile, the revenue outturn in 2025 was favourable due to discretionary increases in social security contribution rates. However, the fiscal expansion has since gained traction. The fiscal reform has led to significant debt uptake, with spending accelerating accordingly over the course of 2025. By 2025-Q4, the deficit had risen to 4.4% of GDP, up from 2.8% a year earlier. A sharp increase in public investment in 2025-Q4 was largely driven by deliveries of military equipment.
Looking ahead, fiscal policy is set to become expansionary, especially in 2026. The general government deficit is forecast to increase to 3.7% of GDP in 2026 and 4.1% in 2027. Expenditure growth will be driven by additional investment-related expenditure, supported by the German recovery and resilience plan in 2026, and an increase in defence spending. Meanwhile, growth in social spending will slowly moderate, remaining elevated. At the same time, following strong revenue growth in 2025, revenue expansion is expected to slow considerably in 2026 due to discretionary tax relief measures for businesses and households. The decline in revenue growth is supported by increases in social security contribution rates. As a result of the fiscal expansion, the debt-to-GDP ratio will rise from 63.5% in 2025 to 65.8% in 2026 and 68.0% in 2027.