German institutes raise 2026 GDP forecast to 1.3% as labor market shrinks

Upward revisions for economic growth

Germany's leading economic research institutes have upgraded their gross domestic product forecast for 2026 to 1.3%, more than doubling the 0.6% rate predicted in their spring assessment. The joint forecast, produced by DIW Berlin, the Ifo Institute, the Kiel Institute for the World Economy, IWH Halle, and RWI Essen, projects growth to continue at 1.1% in 2027 before decelerating to 0.4% in 2028. The upward revision reflects stronger exports, debt-financed government spending on defense and infrastructure, and commercial activity linked to artificial intelligence. Fallout from the war involving Iran proved less disruptive to broader consumer prices than earlier feared, despite elevated energy and fuel costs.

The German economy has been in an upswing since the end of last year. But this upswing stands on a narrow foundation.

Labour market contraction and demographic shifts

Even as gross domestic product expands, employment levels across Germany are projected to contract. A separate autumn forecast published by the Institute for Employment Research in Nuremberg projects total employment to fall by 210,000 in 2026 and by a further 140,000 in 2027. Contributory employment, which covers jobs subject to social security payments, is forecast to drop by 70,000 to 34.89 million in 2026, followed by a decrease of 40,000 positions in 2027. The research institute attributed the contraction primarily to demographic aging, noting that incoming migration no longer offsets the volume of retiring workers leaving the labor force.

2026 will be the first year since the 2009 global financial crisis in which employment subject to social security contributions no longer grows.

Sector divergence between industry and services

The employment contraction is distributed unevenly across the economy. In manufacturing, payrolls are forecast to shed 160,000 jobs in 2026 and 130,000 in 2027, representing a combined loss of 290,000 positions across the two-year period. Researchers linked the industrial slump to structural transformation, trade uncertainty connected to United States tariff policy, and Middle East conflict. In contrast, public services, education, and healthcare are projected to add 170,000 jobs in 2026 and 150,000 in 2027, expanding by 320,000 workers due to childcare service expansion and the requirements of an aging population. Total registered unemployment is expected to rise by 50,000 in 2026 and 20,000 in 2027, bringing the overall figure to 3.018 million.

Policy critique and structural challenges

The research institutes advised against further consumer relief measures, contending that rising household disposable incomes and recent wage settlements have compensated for past inflation. Oliver Holtemöller criticized the federal government's fuel rebate as counterproductive, arguing that subsidizing fuel prices suppresses the price signals required during energy shortages. The institutes noted that private consumption and corporate investment continue to lag due to persistent business skepticism, high energy costs, and climbing social security contributions. Stefan Kooths of the Kiel Institute for the World Economy called on the government to adhere to firm reform plans, warning that announcing and revising legislative packages on a quarterly basis discourages corporate investment.

It simply requires a climate in which people once again have confidence that things will proceed reasonably in this country. That seems to me to be the biggest problem at the moment.