Germany’s economy is heading for its fastest growth in four years as exports and government debt-funded spending help end years of stagnation, according to the latest official forecasts.
Europe’s largest economy is now expected to expand by 1.3 per cent this year, more than twice the 0.5 per cent growth projected by the government in April. For 2027, Berlin now expects a GDP increase of 1.1 per cent.
“The German economy is on a growth path and has proved more resilient than expected,” the economics ministry said in a statement on Thursday, adding that GDP “expanded strongly” over the first six months of the year “despite the conflict in the Middle East and higher energy prices”.
Germany’s economy had been stuck in a rut since the start of Russia’s full-scale invasion of Ukraine in 2022 as higher energy prices and widespread uncertainty pushed the country into the longest stagnation in its modern history. On a quarterly basis, economic output only surpassed its late-2022 peak in the first half of 2026.
Last year, Chancellor Friedrich Merz’s coalition embarked on a massive debt-funded investment programme, earmarking €1tn to be spent on infrastructure and defence over the next decade.
“Fiscal stimulus from the special funds and defence spending is expected to have a noticeable impact on public investment and government consumption” by 2028, the government said on Thursday.
The economy’s resilient performance comes despite the US-Iran war sparking a second energy price shock in less than five years.
After the US and Israel launched attacks on Iran in late February, the oil price surged from below $70 a barrel to above $100, prompting two interest rate increases by the European Central Bank since June. Traders have fully priced in a third quarter-point increase in rates to 2.75 per cent by early 2027.
Fears about rising inflation and government debt in the US and Europe have sent bond prices haywire in recent weeks. Yields on German 10-year government bonds rose to 3.64 per cent in late September, the highest level in more than 15 years, although France has become the main focus of concerns in the Eurozone.
The new German government forecasts show that higher energy prices are weighing heavily on household spending, however. Private consumption is expected to rise by only 0.3 per cent this year, compared with 1.3 per cent in 2025.
The government expects the inflationary shock to persist throughout 2027, forecasting an average inflation rate of 3 per cent next year, up from 2.7 per cent in 2026.
Instead, the recovery is being driven by exports and investment. This year, investment spending is expected to increase by 0.6 per cent, while exports are forecast to increase by 3.7 per cent, helping to offset weak household consumption.
The government attributed the rise in exports to “a one-off factor” in the second quarter, saying: “Amid global shortages, inventories of energy-intensive goods produced in Germany were built up.”
Part of the higher 2026 growth is also a statistical effect resulting from a recent upward revision of GDP estimates for 2024 and 2025 by Germany’s statistical office. As a consequence, the GDP level at the start of 2026 is higher than previously expected, which automatically results in a higher average growth rate for the full year.
Data visualisation by Keith Fray