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Business Cycle Germany
he German economy is still awaiting stronger momentum. Leading indicators have stabilized in recent months, and business expectations have even improved markedly in anticipation of higher public spending. Nonetheless, economic activity is likely to likely to remain broadly flat through year-end, as U.S. tariff policy continues to weigh on growth. After two years of contraction, however, GDP is expected to increase by a modest 0.1 percent in 2025. From 2026 onwards, the federal government is set to make greater use of its newly gained fiscal space. We project that expansionary fiscal policy will contribute about 0.6 percentage points to GDP growth in 2026, and approximately half that amount in 2027. GDP is expected to expand by 1.3 percent in 2026 and 1.2 percent in 2027. When factoring in the additional boost from calendar effects in 2026 (around 0.3 percentage points), the underlying pace of expansion remains subdued. While cyclical slack leaves some room for recovery, much of the recent stagnation — output in 2025 is still no higher than in 2019 —reflects structural weaknesses. These are evident in Germany’s comparatively weak international performance and the continued loss of export market share. As growth gradually picks up, labor market conditions should improve, with the unemployment rate projected to fall from 6.3 percent in 2025 to 5.8 percent in 2027. Business investment is expected to increase again as sentiment improves, albeit from a low base. Exports are likely to rise moderately from 2026 onwards, though losses in competitiveness will likely continue to erode market shares. The general government deficit is set to widen from 2 percent of GDP in 2025 to 3.5 percent by 2027.
