The projected timeline indicates an end to the economic crisis by 2026.
Light at the End of the Tunnel: Germany's 2026 Economic Outlook
The German economy is showing signs of recovery, with four economic research institutes revising their 2026 forecasts upwards. The Ifo Institute, for instance, expects a 1.5% increase in GDP next year, double the initially assumed 0.8%.
The Kiel Institute for the World Economy (IfW) follows suit with a predicted growth rate of 1.6%. The Leibniz Institute for Economic Research (RWI) and the Leibniz Institute for Economic Research in Halle (IWH) are also optimistic, projecting a strong increase of 1.5% and 1.1%, respectively. However, the long-term outlook for the coming years remains dim, according to Ifo.
A Slightly Brighter 2025
Ifo's chief economist Wollmershäuser noted, "The crisis of the German economy reached its lowest point in the winter half-year." The institutes also expect a slightly better development for this year compared to the spring. For example, Ifo has raised its forecast for this year from 0.2 to 0.3%, and IWH from 0.1 to 0.4%.
However, economic progress in Germany is not anticipated for this year. The economic performance had shrunk in 2023 and 2024, marking the longest stagnation phase in post-war German history, as Wollmershäuser pointed out.
Factors Aiding Recovery
One reason for the improved expectations is the announced growth package of the new federal government. The Ifo Institute estimates the economic impact of the announced expenditure increases, tax cuts, and investments this year at 10 billion euros, and next year at 57 billion euros.
However, it's crucial that the federal government's announcements are followed by actions, according to RWI's chief economist Torsten Schmidt. He criticized calls from the states for compensation for falling tax revenues, saying it only hinders the return to sustainable growth in Germany.
Long-term Prospects: A Bleak Horizon
While the outlook for 2026 is promising, the long-term horizons are "rather bleak," as Wollmershäuser put it. "We have to get used to the fact that we will grow on average with less than half a percent until the end of the decade." The Ifo Institute estimates the medium-term annual growth potential of the German economy at only 0.3 to 0.4%.
The reason is the "demographic turning point," as Wollmershäuser said. "2025 is the first year in which the potential labor force will decrease." Germany must better integrate women and older people into the labor market, for example, through better childcare options and fewer incentives to retire early, to address the skill shortage that threatens to become a major brake on economic growth.
Hope Amid Uncertainty
The improved economic forecasts for this and next year are partly based on the assumption that the trade conflict initiated by the US government with the EU will have a positive outcome. The recovery is expected, but the economy remains vulnerable to external shocks, particularly changes in U.S. trade policy and global tariff regimes.
The European dispute with the United States has not yet been resolved, with a significant risk to the German economy lying in a possible escalation of US trade conflicts. A resolution or moderation of these tensions could further support export-led growth.
Key Forecast Indicators (2025–2026)
| Indicator | 2025 (Forecast) | 2026 (Forecast) ||---------------------------|-----------------|-----------------|| GDP Growth | 0–0.4% | 1.0–1.6% || Inflation | 2.1–2.4% | 1.9–2.0% || Unemployment | 3.4–3.6% | 3.3% || Public Debt (% GDP) | ~63.8–64% | ~64–64.7% || Government Deficit (% GDP)| ~-2.7–-2.9 | ~-2.9 |
The announced growth package of the new federal government is expected to have a positive impact on the finance and business sectors, with the Ifo Institute estimating an economic impact of 10 billion euros this year and 57 billion euros next year.
However, the long-term prospects for the German economy remain bleak, with the Ifo Institute estimating the medium-term annual growth potential at only 0.3 to 0.4%, mainly due to the demographic turning point in 2025 when the potential labor force is expected to decrease.
