The supply side growth forgot.
Labour cracks, productivity stalls, and capital waits.

For more than ten years the German labour market was the economy's shock absorber: through the euro crisis, the pandemic and the energy shock, employment held and unemployment fell. In 2026 that broke. Registered unemployment rose past 3.0 million in the spring, the highest level since March 2011, and the usual seasonal spring rebound failed to materialise. Employment has been declining month on month since mid-2025. The national unemployment rate has drifted to around 6.3 percent on the Federal Employment Agency's measure; on the harmonised Eurostat measure Germany sits lower, near 4 percent, but the direction is the same and it is the wrong one.

This is not yet a recession-scale deterioration. It is, however, the first genuine cyclical crack in the labour market in a generation, and it is concentrated where the structural problem lives: manufacturing, and the automotive supply chain in particular. Job losses there are being only partly offset by gains in public services such as health and education - which is itself a sign of an economy rebalancing away from its industrial core.

Behind the cyclical labour story is a structural productivity stagnation that long predates the current downturn. German labour productivity growth has been essentially flat through the stagnation years, and the level has barely advanced since the late 2010s. The causes are familiar and slow-moving: under-investment in digital infrastructure, a regulatory and permitting burden that delays projects, an energy-cost disadvantage that discourages capital deepening, and a manufacturing model optimised for a world of cheap Russian gas and open Chinese demand that no longer exists.

The supply constraint is partly demographic and therefore largely fixed for the medium term. The working-age population is shrinking as the baby-boom cohorts retire faster than younger and immigrant workers replace them. This has two consequences that pull in opposite directions: it tightens the labour market structurally, which supports wages and limits how high unemployment can sustainably rise, but it also caps the economy's trend growth rate. With a falling labour input and flat productivity, Germany's sustainable non-inflationary growth rate has fallen toward 0.5 to 0.75 percent - which is why a fiscal impulse worth 11 percent of GDP produces under one point of growth.

The one supply-side lever Berlin can pull quickly is investment, and that is precisely what the fiscal package targets. The infrastructure fund and the defence build-out are, in principle, exactly the capital-deepening the economy needs. The risk, again, is execution and composition: investment in roads and barracks raises capacity less than investment in the energy grid, digital networks and the electrification of industry. The industrial electricity-price scheme for 2026 to 2028 is an attempt to keep energy-intensive capacity in the country long enough for that investment to matter.

For allocators the supply-side diagnosis has a clear implication. Germany is not a cyclical bounce-back story where a demand impulse meets idle capacity and growth surges. It is a structural-repair story where the return on the fiscal spend depends on whether it raises productive capacity. That makes the medium term - 2027 and 2028 - more interesting than 2026, and it makes execution risk the dominant risk.

We see the supply side as the binding constraint on Germany's medium-term growth and the true test of the fiscal experiment. The base case is gradual improvement as investment raises capacity through 2027 and 2028, with the labour market stabilising rather than collapsing because demographics put a floor under it. The bull case requires a genuine productivity response to the investment surge; the bear case is the one where the money is spent without raising capacity and Germany ends the decade more indebted and no more productive.