Three lost years, then a fiscal jolt
Germany has not produced a calendar year of meaningful growth since 2021. Real output contracted in 2023 and 2024 and was essentially flat in 2025, leaving the level of GDP roughly where it stood before the pandemic recovery stalled. The 2026 story is supposed to be different, and in one respect it genuinely is: the Merz government's debt-brake reform and the €500 billion infrastructure fund have unleashed the largest fiscal impulse in modern German history. Yet the consensus for 2026 growth sits between the Bundesbank's 0.6 percent and the German Economic Institute's 0.9 percent, with the ifo Institute at 0.8 percent. A fiscal expansion worth more than 11 percent of GDP over its life is buying less than a percentage point of growth this year.
The explanation is partly mechanical and partly structural. Mechanically, public money takes time to convert into orders, tenders and poured concrete; the Bundesbank expects activity to strengthen only from the second quarter onward. Structurally, the same forces that produced three stagnant years - high energy costs, weak external demand, an over-exposed automotive complex and a shrinking working-age population - have not gone away.
The energy shock that rewrote the spring
The Joint Economic Forecast published on 1 April 2026 carried an unusually blunt subtitle: the energy-price shock overshadows the fiscal stimulus. The Iran conflict pushed wholesale energy higher through the spring, and the institutes expect it to lift German inflation to around 2.9 percent in the second quarter even as the underlying disinflation continues. For an economy whose competitive problem is already the price of power, a fresh energy shock is the worst possible accompaniment to a public-investment boom.
The June agreement to reopen the Strait of Hormuz has since pulled oil sharply lower and taken the acute risk premium out of the curve. But the institutes are explicit that energy will stay structurally above the pre-war baseline for a long time, and that firms will pass those costs through. The net effect is a recovery that is real at the headline but thin underneath: government demand rising sharply, private demand still cautious.
The uncomfortable arithmetic of 2026 is that Berlin is spending like a country in a depression and growing like a country in a soft patch. The gap between the two is the measure of how much structural damage the energy and competitiveness problems have done.
The high-frequency picture
The monthly flow is consistent with a bottom rather than a turn. Industrial production remains weak and order books in manufacturing are still below their long-run average. The ifo business-climate index has improved off its lows on the strength of expectations rather than current conditions - firms believe the fiscal money is coming, but have not yet felt it. The automotive complex is a persistent drag: BMW's mid-June profit warning, blamed on US tariffs and Chinese competition, is emblematic of a sector squeezed at both ends.
| Indicator | Latest | Reading |
|---|---|---|
| Real GDP, 2026E | +0.6 to +0.9% | Weak recovery |
| HICP inflation, May | 2.7% | Disinflating, core sticky |
| Registered unemployed | 3.006m | Highest since 2011 |
| ifo business climate | Improving | Expectations > conditions |
| Industrial orders | Below average | No turn yet |
| Exports to US, 2025 | -9.4% | Tariff drag |
Consumption, the missing engine
Real wages have recovered as inflation has fallen from its 2022-2023 peak, and the household savings rate remains elevated. In a normal cycle that combination would power a consumption-led upswing. It has not, because German households are saving precautionarily against exactly the uncertainties this report catalogues: a labour market that is softening for the first time in over a decade, an industrial base under visible strain, and a political environment in which the far-right AfD now leads several national polls. Confidence, not capacity, is the binding constraint on private demand.
This matters for the shape of the recovery. A government-led expansion that fails to hand off to private consumption and investment is fragile by construction: it lasts exactly as long as the fiscal impulse and no longer. The central question for the next four quarters is whether the public money crowds in private activity or simply substitutes for it.
Base case and the risks around it
Our base case is a recovery that is genuine but unspectacular: growth accelerating through the second half as infrastructure tenders convert into activity, full-year 2026 around 0.7 to 0.8 percent, and a stronger 2027 of roughly 1.3 to 1.5 percent as the fiscal machine reaches cruising speed. The risks are asymmetric to the downside in 2026 - a renewed energy spike, a sharper US-tariff hit to autos, or a confidence shock from politics - and to the upside in 2027, where the multiplier on defence and infrastructure spending could surprise if execution improves.