German institutes double 2026 growth forecast to 1.3% as business sentiment rises

Upgraded growth projections

Germany's five leading economic research institutes (RWI in Essen, the Ifo Institute in Munich, IfW in Kiel, IWH in Halle, and DIW in Berlin) raised their collective gross domestic product forecast for 2026 to 1.3%, more than double the 0.6% projected in earlier spring estimates. The joint report, commissioned by the Federal Ministry for Economic Affairs, also revised the 2027 outlook upward from 0.9% to 1.1%, while projecting a slowdown to 0.4% expansion in 2028. The Organisation for Economic Co-operation and Development similarly adjusted its German growth forecast for 2026 to 1.1%, up from 0.7% in June. Chancellor Friedrich Merz declared that the country had emerged from the valley of recession and economic stagnation.

The economy has developed more robustly than expected. However, the recovery rests on a narrow foundation, as high energy prices and structural problems continue to weigh on economic activity.

Industrial demand and public spending

The upward revision reflects increased foreign demand for German chemicals, petroleum products, and natural gas derivatives, which gained market share as international competitors faced supply constraints linked to the closure of the Strait of Hormuz. German enterprises also registered orders tied to artificial intelligence data center construction, electrical equipment manufacturing, and communication technologies. Extraordinary federal spending on transport networks, rail corridors, and military modernization provided additional momentum. However, economists noted that this fiscal expansion relies on borrowing, with Germany's public deficit projected to rise from 4.1% of GDP in 2026 to 4.7% in 2028 alongside mounting debt service costs.

Business sentiment climbs to multi-year high

Sentiment among German business executives strengthened for the fifth consecutive month in September. The Ifo Institute business climate index rose to 89.9 points from 88.8 in August, surpassing the 89.0 level anticipated by analysts in a Reuters survey and reaching its highest reading since June 2023. Based on 9,000 corporate responses, the current situation assessment climbed from 88.5 to 89.5 points, while the business expectations metric reached 90.4 points, passing the 90-point threshold for the first time since February. Across sectors, electrical equipment makers reported stronger optimism, whereas the automotive industry faced continued operational difficulties and declining order backlogs.

The German economy continues its recovery.

Structural obstacles and policy delays

Despite positive headline figures, domestic investment and private consumption remain constrained by elevated energy costs and demographic contraction. Economists warned that labor shortages will intensify as retirements outpace new entrants into the workforce, an issue compounded by political resistance to skilled foreign immigration following state elections in eastern Germany where the Alternative for Germany (AfD) placed first. The resulting political friction has prompted coalition leaders to reconsider planned overhauls to the healthcare and pension systems, creating regulatory uncertainty for corporate planning.

When reform packages are announced, unpacked, and then postponed on a quarterly basis... that leads to what we call a wait-and-see attitude among investors.