German Economy in Autumn 2026: Recovery underway – deficiencies remain

The German economy has regained some momentum. Economic activity has picked up noticeably recently, and despite geopolitical headwinds, firms are somewhat more optimistic about the outlook. The economy therefore appears to have moved beyond the cyclical trough. However, despite the recent improvement, the recovery remains fragile. The war in Iran continues to pose downside risks, while the additional fiscal stimulus will fade in the years ahead. Moreover, much of the economic weakness of recent years has reflected structural factors that will continue to weigh on economic activity. Overall, we now expect GDP to grow by 1.3 percent this year, a substantial upward revision from our summer forecast of 0.8 percent. For next year, we continue to expect growth of 1.0 percent. As the recent increases in commodity prices are passed through to consumers only gradually, inflation is projected to remain elevated at 2.7 percent both this year and next. The associated losses in household purchasing power will weigh on private consumption. Inflation is not expected to fall markedly until 2028, when it is projected to decline to 1.9 percent, allowing private consumption to regain some momentum. Exports have returned to growth following substantial declines in previous years, although deteriorating competitiveness will lead to further losses in global market share. Private investment is likely to remain subdued amid persistent weaknesses in Germany as a business location. At the same time, the recovery in the labor market will increasingly be overshadowed by demographic change. While the unemployment rate is projected to decline from 6.3 percent this year to 6.0 percent in 2028, employment is expected to fall as labor supply shrinks. The general government budget deficit is projected to increase from 3.0 percent of GDP in 2025 to 4.3 percent in 2028.

Kiel Institute Experts