Germany lifts 2026 growth forecast to 1.3%

The German government on Thursday projected economic growth to hit 1.3% this year, a significant rise from its forecast of 0.5% in April.

Europe's largest economy has proved to be more resilient than expected amid the war in Iran and the subsequent rise in energy prices, the Economy Ministry said. 

Exports, public investment and higher defence spending are seen as the main drivers of growth. 

According to the ministry, German foreign trade even benefited at times from global supply bottlenecks, which pushed buyers to replenish their stocks with energy-intensive goods produced in Germany.

The government expects economic growth to continue in 2027, predicting gross domestic product (GDP) to advance by 1.1% in 2027, up from 0.9% in the April forecast. 

However, it cautioned that future developments will depend largely on the course of the wars in the Middle East and in Ukraine. For 2028, the government forecast growth of just 0.6%.

At the end of September, leading German economic research institutes had already lifted their growth forecast for Germany to 1.3%. They had previously warned of an "energy price shock" triggered by the war in Iran, but said this had turned out to be less severe than initially feared.

Economy Minister Katherina Reiche emphasized ahead of the October forecast that growth remains "fragile." 

She told Germany's lower house, the Bundestag, that the country was being weighed down by external crises such as the Iran war. "But above all, we have our own homework to do," she admitted.

Reiche called for fewer restrictions, saying more flexible working hours, less bureaucracy and competitive energy prices could help.

Chancellor Friedrich Merz's government is trying to push through a wide-reaching package of reforms, including changes to taxation, the labour market and pensions, which it hopes will boost the country's flagging economy.

Despite the more optimistic forecasts from the government and economic research institutes, the German Foreign Trade Association (BGA) does not yet consider the recovery in Germany to be consolidated. 

According to a survey by the association, the business situation for companies has improved. Firms have diversified their procurement and distribution channels and adapted to the crises, the group said. "Companies are seeing the light at the end of the tunnel again, but are still proceeding with the handbrake on," BGA President Dirk Jandura.

Although exports are cited as the reason for the revised forecast, signs of a slowdown were already emerging in August. The value of exports fell by 0.8%, adjusted for calendar and seasonal effects, to €138 billion ($154 billion).

The German Chamber of Industry and Commerce (DIHK) also warned against excessive optimism. "Uncertainties surrounding trade policy and structural disadvantages are once again holding back the export sector," said Volker Treier, head of foreign trade at the DIHK.

He said the current decline shows that the upturn in exports was "nothing more than a gentle breeze."

DIHK chief executive Helena Melnikov said the upturn is based primarily on rising exports to the EU internal market and on debt-financed government spending. "Without substantial economic reforms, this upturn will be short-lived," she warned, calling for lower costs, less bureaucracy and modernized infrastructure.