Bundesbank sees minimal German growth, inflation remains stuck

The Bundesbank expects a gradual revival of the German economy over the course of the coming year, forecasting 0.6% growth for 2026 after three years of weak performance, the central bank said on Friday.

The projection, released in its monthly report for December, is slightly more pessimistic than in June, when it predicted a calendar-adjusted 0.7% increase in real gross domestic product (GDP) for next year.

Several other economic forecasts have also been revised down recently.

Taking into account the additional working days in the coming year, the Bundesbank’s projection is somewhat more optimistic. The current year is likely to deliver mini-growth of 0.2%, the central bank said.

"The German economy will make headway again in 2026: While progress will be subdued initially, it will then slowly pick up," Bundesbank President Joachim Nagel said in presenting the Bundesbank’s new Forecast for Germany.

"Starting in the second quarter of 2026, economic growth will strengthen markedly, driven mainly by government spending and a resurgence in exports," he explained.

For the first quarter of 2026, the Bundesbank expects an increase of 0.1% on the previous quarter, as in the final quarter of 2025.

The upswing is set to gain significant momentum in 2027, the Bundesbank said. It expects 1.3% growth then, which is 0.1 percentage points more than estimated in June.

In 2028, Europe’s largest economy is forecast to expand by 1.1%, according to the Bundesbank. Increasingly, momentum should come from multibillion-euro government spending on infrastructure such as roads and rail and from investment in defence.

Exports, recently held back by higher US tariffs, are expected to return to an expansion path over the course of the coming year, the bank said. That should spur corporate investment.

The Bundesbank also sees upside potential in private consumption, an important pillar of domestic activity.

"Strongly rising wages and a gradual improvement in the labour market will underpin real income and thus consumption," the bank wrote in its report.

However, the inflation rate will decline more slowly than expected because of wage growth and a less pronounced fall in energy prices, the Bundesbank said.

After 2.3% inflation this year, it expects a rate of 2.2% for 2026 calculated by the European method (HICP), 2.1% in 2027 and 1.9% in 2028, meaning the European Central Bank’s (ECB) 2% target will be roughly reached. Higher inflation rates erode people’s purchasing power.