German Economy in Winter 2025: Structural headwinds meet fiscal tailwinds

The German economy has stabilized at a low level, but more than modest growth is currently out of reach. From next year onward, expansionary fiscal policy will boost economic activity. However, the high GDP growth rates projected for the coming years mask the weak underlying economic conditions. Excluding the fiscal impulse and the additional boost from calendar effects, the fundamental pace of expansion will remain subdued. The scope for a cyclical recovery is narrower than current capacity-utilization indicators suggest. In manufacturing, in particular, low utilization reflects the erosion of competitiveness and may precede further reductions in productive capacity. German exporters are expected to continue losing global market share, even though the phase of declining exports is coming to an end. Overall, we forecast GDP growth of 1.0 percent in 2026 (autumn forecast: 1.3 percent) and 1.3 percent in 2027 (autumn forecast: 1.2 percent), following an increase of 0.1 percent this year. For next year, we assume a somewhat smaller fiscal impulse than in the autumn projection, alongside stronger structural headwinds compared to the autumn forecast. In particular, firms show no sign of significantly increasing investment. As economic activity strengthens, the labor market is expected to stabilize, with the unemployment rate declining from 6.3 percent this year to 5.9 percent in 2027. However, employment gains will be increasingly constrained by demographically driven labor shortages. The public deficit is projected to rise from 2.4 percent of GDP in 2025 to 4 percent in 2027. Public debt is expected to increase to 65.4 percent of GDP by 2027.