IW triples German 2026 growth forecast to 1.2% following strong first half

Upgraded growth projections and early momentum

The Cologne-based German Economic Institute (IW) tripled its economic growth forecast for Germany in 2026, raising its projection from 0.4% to 1.2%. The upward revision, detailed in the institute's autumn forecast ahead of official publication on 20 September, follows stronger than anticipated economic performance during the first six months of the year. Economists at the institute noted that a dedicated special fund for infrastructure modernization, financed entirely through public debt, became available for the full year for the first time. Commercial enterprises also increased inventory purchases during the first half of 2026, buying large volumes of German-made chemical and electrical products to hedge against supply disruptions linked to the war against Iran. Looking ahead to 2027, the institute forecasts domestic economic growth of roughly 1%, which would establish two consecutive years of expansion following previous periods of economic stagnation and contraction.

Second-half deceleration and consumer pressures

Economic momentum across Germany is projected to ease substantially during the second half of 2026 as temporary export factors fade. Domestic private consumption remains constrained by elevated energy prices, which rose after the United States military intervention against Iran affected energy markets in the Persian Gulf. Higher fuel prices at service stations continue to erode household purchasing power, holding projected private consumer spending growth to 0.3% for the full year. At the same time, the domestic construction sector remains trapped in an ongoing downturn, leaving government capital expenditure as the primary driver of national economic output.

The institute detailed the mid-year deceleration in its assessment of domestic economic activity:

In the second half of 2026, momentum slows down again.

Fiscal deficits and labor market conditions

Germany's public debt burden is projected to expand in 2026, driven in part by substantial capital allocations for the rearmament of the Bundeswehr. These borrowing commitments will push the federal budget deficit to approximately 4% of gross domestic product by the end of 2026. Total government debt is expected to reach roughly 66% of economic output over the same period. Meanwhile, headline consumer price inflation is projected to average around 2.5% across 2026. The domestic labor market is also forecast to experience a mild downturn, with registered unemployment approaching 3 million people, representing an unemployment rate of 6.3%.

Global trade growth and external operational risks

Beyond domestic borders, the institute projects global economic output to grow by 2.3% in 2026, alongside a 5% expansion in global trade volume. Global economic activity is finding support in the adoption of emerging technologies, particularly artificial intelligence systems and green energy infrastructure.

The institute described how technological investments are transforming international trade flows:

As a result, demand for technology goods rises strongly and leads to higher export volumes, especially in Asia.

Despite these technology-driven export volumes, the German economy remains exposed to external vulnerabilities. Key operational risks identified by the institute include the war in Ukraine, wider Middle Eastern conflicts, international trade disputes, and low water levels across European river transport networks.