In Germany, business sentiment improved in the spring, but corporate optimism has not strengthened further since the summer. Output stagnated in the third quarter. Public consumption rose markedly, while households curtailed spending and exports fell. After a steep drop in the second quarter, investment edged up slightly, driven mainly by higher government spending on equipment, probably largely linked to defense procurement. Employment recorded a slight decline. Against this backdrop, wage growth remains notably strong. Since wage income tends to be spent more readily than investment income, household consumption is expected to rise in 2026. “The main stimulus for the German economy, however, will come from additional public spending on infrastructure and defense, even though disbursement of funds is likely to proceed more slowly than planned due to implementation challenges,” says Oliver Holtemöller, head of the Macroeconomics Department and Vice President at the IWH. Moreover, as the dampening effects of US tariff hikes are likely to fade, exports will edge up slightly in 2026. Overall, the recovery will be driven primarily by domestic demand.

According to this forecast, the economic recovery in 2026 will be based primarily on higher investment due to fiscal stimulus and a slight upturn in exports. However, both parts of the forecast are subject to uncertainty. For example, the capacities of the construction and defense industries could be exhausted more quickly than assumed here. In this case, the fiscal stimulus would mainly have an impact on prices rather than production, with at most minor multiplier effects due to higher incomes in the sectors that benefit from the rise in public spending. The stabilisation of German exports is at risk if Chinese economic policy increasingly tries to compensate for weak domestic demand in China by winning new export markets with the help of subsidies. “This would particularly affect the German export economy, as Chinese and German companies are direct competitors in many markets for manufactured goods,” says Oliver Holtemöller.

The extended version of this forecast contains three boxes (all in German): 

Box 1: Is there a stock market bubble in major tech companies? 
Box 2: GDP Revisions in the U.S. and Germany 
Box 3: On the estimation of potential output 

Publication: Drygalla, Andrej; Exß, Franziska; Heinisch, Katja; Holtemöller, Oliver; Kämpfe, Martina; Kozyrev, Boris; Lindner, Axel; Mukherjee, Sukanya; Offen, Karoline; Sardone, Alessandro; Schult, Christoph; Schultz, Birgit; Zeddies, Götz: Konjunktur aktuell: Leichte Belebung kommt, Strukturprobleme bleiben. IWH, Konjunktur aktuell, Jg. 13 (4), 2025. Halle (Saale) 2025.