German Economy in Summer 2026: Modest momentum amid elevated risks

The German economy is currently facing opposing forces. While expansionary fiscal policy is supporting economic activity, the consequences of the Iran war are weighing on growth. Beyond these effects, the economy is showing tentative signs of recovery, but structural impediments continue to prevent a broad-based recovery from gaining traction. This is also reflected in the unusual pattern of the emerging recovery. Unlike in previous upturns, there are so far few signs of strong growth in exports and business investment. Instead, the expansion is expected to be driven primarily by public investment and consumption, supported by the expansionary fiscal stance. The sharp rise in commodity prices following the Iran war is eroding purchasing power and is projected to push inflation up to 2.8 percent this year. Inflation is expected to remain elevated at 2.3 percent next year. Market expectations now point to considerably more persistent commodity price increases than assumed in the spring, suggesting that economic activity will continue to be affected well into next year. As a result, the drag from higher commodity prices is likely to be stronger and longer-lasting than projected in our spring forecast. Against this backdrop, we project GDP growth of 0.8 percent in 2026 and 1.0 percent in 2027. Compared with our spring forecast, we now expect weaker growth next year (spring forecast: 1.4 percent), mainly because higher commodity prices are likely to weigh more heavily on the economy and fiscal policy is expected to provide somewhat smaller impulses. Labor market conditions are expected to improve only gradually. In addition to subdued economic growth, employment is increasingly being constrained by demographic change, which is reducing the number of people available to the labor market. The expansionary fiscal stance is projected to raise the budget deficit from 2.8 percent of GDP in 2025 to 4.1 percent in 2027.

Kiel Institute Experts