The German economy is showing early signs of recovery, prompting the German Institute for Economic Research (DIW Berlin) to significantly revise its growth forecast upwards. According to its latest summer outlook, Germany’s GDP is expected to grow by 0.3 percent in 2025 and by a stronger 1.7 percent in 2026. These projections are 0.2 and 0.6 percentage points higher than the institute’s spring forecast. The upward revision is attributed to a stronger-than-expected start to the year, driven by rising private consumption and a surge in exports—partly due to anticipatory purchases ahead of anticipated US tariffs. The momentum from early 2025 is expected to continue into the second quarter, although a slowdown is anticipated later in the year as the positive effects of early export activity wane and trade barriers begin to take their toll. The outlook remains mixed, with persistent uncertainty from US trade policy and structural weaknesses in the German economy—such as declining competitiveness and labour shortages—still weighing on growth prospects. However, DIW Berlin sees signs of a stronger recovery starting at the end of 2025 and continuing into 2026, supported by expansive fiscal policy and improving financing conditions. A key driver behind the improved forecast is Germany’s recently adopted investment package, which includes a €500 billion infrastructure fund over twelve years and the temporary suspension of the debt brake for defence spending. While these measures are not expected to have a substantial impact in 2025 due to planning delays and the late budget adoption, fiscal stimulus worth around €25 billion is projected for 2026, potentially boosting GDP by an additional 0.8 percentage points. This could lead to a slight increase in inflation, with DIW projecting a rise from 2.1 percent in 2025 to 2.2 percent in 2026. DIW Chief Economist Geraldine Dany-Knedlik acknowledged the short-term boost but cautioned that the underlying structural issues remain unresolved. She noted that the investment package could provide a welcome impulse, especially for infrastructure, but warned that Germany’s foreign trade performance is likely to remain subdued. Ongoing trade tensions, particularly with the United States, continue to hinder external demand, while the competitiveness of German companies—especially in comparison to Chinese firms—is under pressure. Despite these challenges, private consumption is providing some positive momentum. Consumer confidence improved in the first quarter, evidenced by a drop in the savings rate. However, lingering fears over job security could dampen this trend, as the unemployment rate is forecast to rise slightly over the coming months. Meanwhile, low interest rates and government support are helping to gradually improve the investment climate. Internationally, Germany’s recovery could have a positive spillover effect on other EU member states and the broader eurozone. However, the global outlook remains clouded by US trade policy, which is expected to slow growth not only in export-oriented economies like Germany, but also in the US itself. DIW forecasts US economic growth of just 1.4 percent in 2025 and 1.6 percent in 2026, down from 2.8 percent last year. Global GDP is projected to rise by 3.3 percent this year and 3.4 percent next year. DIW President Marcel Fratzscher warned that the biggest risks to Germany’s recovery may lie within its own political system. He cited the potential for renewed domestic and EU-level political gridlock, as well as uncertainties around fiscal planning, taxation, and social spending. He urged the federal government to quickly adopt budgets for 2025 and 2026, resolve internal divisions, and articulate a clear, forward-looking policy agenda. Fratzscher remained cautiously optimistic. If the government can fully implement its investment strategy and foster a renewed sense of public confidence, Germany could be poised for a more robust economic recovery in 2026 and 2027. However, he noted that many of the country’s longer-term structural challenges—such as energy transition, demographic pressures, and productivity concerns—will continue to require attention well beyond the current forecast horizon. Source: DIW Berlin