Germany Doubles 2026 Growth Outlook as Manufacturing Rallies

Germany more than doubled its growth forecast for this year after a stronger-than-expected first half, as robust exports and a surge in government spending outweighed weak consumer activity.

Gross domestic product is expected to expand by 1.3% in 2026 — the fastest jump since 2017 — and 1.1% in 2027, the Economy Ministry said in its autumn projection. That compares with previous estimates 0.5% and 0.9%, respectively. It sees the advance slowing after, with 0.6% growth in 2028 as the economy remains subject to volatile geopolitics that have driven up energy prices.

"The German economy is on a growth trajectory and has proven to be more resilient than expected," the ministry said in a statement on Thursday. "Future economic developments depend largely on the course of geopolitical conflicts in the Middle East and Ukraine."

The forecast showed that Europe's largest economy withstood the blow of war in the Middle East better than had been anticipated, particularly in its core manufacturing sector. Companies building up inventories of German-made energy-intensive goods in response to global supply constraints offered an unexpected boost, the ministry said.

Bracing for the impact of the US-led war on Iran and energy disruptions, the government halved its growth forecast for 2026 in April. The projection in January had been for 1% growth.

Still, the upgrade offers Chancellor Friedrich Merz limited breathing room. Germany's economy has barely grown over the past three years, and pressure on his unpopular government has intensified after three bruising state election defeats last month that saw a surge in support for the far-right Alternative for Germany.

At the same time, reforms needed to put the recovery on a sustainable footing have stalled after an initial push. Merz's coalition agreed in a meeting in Berlin late Wednesday to grind ahead in its effort to push through a raft of measures.

Recent data have pointed to some stabilization in the struggling manufacturing sector. Industrial production rose 2% in August despite low water levels on the Rhine, while order books have been filling up thanks in part to Germany's rearmament.

The Economy Ministry said it expects momentum this year to be boosted by foreign trade, which benefited from a buildup of inventories. It added that the government's debt-financed spending on infrastructure and defense will also continue to help in the coming years.

Private consumption should remain subdued due to rising prices, however, and private investment is expected to recover only gradually, it said.

A lasting solution to geopolitical crises "would accelerate the recovery," according to the statement. "Conversely, persistently high commodity and energy prices could place a greater burden on businesses and households."

Apart from these threats, Germany's export-oriented industrial sector has been struggling with trade barriers in the US and intensifying competition from China. Companies have also repeatedly cited taxation, regulation, labor costs and lengthy approval procedures as obstacles to investment.