German Economy in Spring 2026: Higher energy price weigh on sluggish economic momentum

The German economy is gradually regaining its footing. The main impulses are expected to stem from expansionary fiscal policy. However, a broad-based and strong recovery remains out of reach, as structural weaknesses—most visibly reflected in the pronounced loss of competitiveness—continue to weigh on economic activity. So far, there are few indications that firms intend to significantly expand investment or employment. Additional headwinds may arise from the military conflict in Iran, which has led to a noticeable increase in commodity prices. This forecast assumes that commodity prices—consistent with market expectations since the onset of the conflict—will remain significantly elevated only for a short period and then start to ease again. Under this scenario, the associated loss of purchasing power amounts to around 0.6 percent relative to GDP this year. While this will weigh noticeably on economic activity, it is unlikely to trigger a downturn. Against this backdrop, GDP is expected to grow by 0.8 percent this year, slightly less than projected in our winter forecast (1.0 percent). For 2027, we anticipate GDP growth of 1.4 percent (winter forecast: 1.3 percent). Inflation is projected to rise more strongly this year than previously expected, reaching 2.5 percent due to higher energy prices (winter forecast: 1.8 percent). For next year, we continue to expect an inflation rate of 2.1 percent. German exporters are likely to expand their business moderately again, although they are expected to continue losing global market shares. Investment activity will be driven primarily by additional public spending, while private investment is likely to remain subdued. Employment is expected to respond with a lag to the economic expansion and will likely begin to increase again only in the second half of this year. The public deficit is projected to rise from 2.7 percent of GDP in 2025 to 4.2 percent in 2027.

Kiel Institute Experts