Germany raises 2026 growth forecast to 1.3% on state spending and exports

Growth forecast revised upward

German Economy Minister Katherina Reiche presented the federal government autumn projection in Berlin on Thursday, marking her third economic forecast since taking office in spring 2025. The revised outlook lifts projected gross domestic product growth for 2026 to 1.3%, more than double the 0.5% rate projected in April. The update aligns federal estimates with the joint assessment released in late September by leading German economic research institutes, ending seven consecutive years of national economic stagnation. Government economists anticipate a further expansion of 1.1% in 2027, up slightly from an earlier 0.9% estimate, before growth moderates to 0.6% in 2028. Reiche confirmed the figures after initial reports emerged earlier in the week, declaring that the economy had passed its low point.

We have left the trough behind, the German economy is growing again.

Public spending and export drivers

The turnaround relies heavily on debt-financed state expenditure alongside temporary gains in foreign trade. State spending, supported by a 500-billion-euro federal special fund targeted at infrastructure, climate protection, and defense, generates two-thirds of the forecast growth. The remaining third originates from increased exports. Despite elevated energy prices stemming from the Iran war, German manufacturers of energy-intensive intermediate goods, including steel, fertilizer, and aluminum, saw higher sales as international buyers built contingency inventories. German electrical component producers also recorded higher orders connected to worldwide investments in artificial intelligence. Additional calendar factors provided modest support, as the scheduling of public holidays created more total working days across 2026.

Structural deficits and labour constraints

Reiche warned that the current rebound lacks a self-sustaining foundation, pointing to subdued private enterprise activity and rising domestic costs. Private business investment is projected to increase by only 0.2% in 2026, while domestic household spending remains dampened by persistent inflation. Demographic decline presents a compounding bottleneck: domestic employment is shrinking, and foreign skilled migration has ceased compensating for retiring workers. Reiche observed that annual working hours in Germany average roughly 1,370 hours, falling below averages recorded in Greece, Spain, and the United States. She also attributed the reduced appeal of Germany to foreign professionals to recent electoral gains by political extremists, warning that prejudice and social exclusion undermine economic competitiveness.

Without self-sustaining growth we will not make it back to the top, and without growth distribution battles will intensify.

Coalition friction on taxes and pensions

The economic forecast coincided with debates inside the black-red governing coalition over structural fiscal policies. Reiche called for reducing bureaucratic procedures, accelerating corporate business registrations, and enacting pension commission proposals to prevent social security contributions from increasing from 42% to more than 47%. Following a quiet Wednesday evening coalition committee meeting, Chancellor Friedrich Merz lengthened the legislative schedule for pension reform, delaying final passage from late 2026 into spring 2027. Concurrently, Finance Minister Lars Klingbeil defended a separate income tax measure in the Bundestag on Thursday morning.

We are providing ten billion euros in relief to the citizens in our country.

Klingbeil argued that the legislation delivers 10 billion euros in direct relief to middle-income citizens financed by increased burdens on top earners. However, the Association of Family Businesses cautioned against misplaced complacency, noting that the broader economic environment remains constrained by high borrowing costs and state debt.