Non-final working translation

The Bundesbank’s new Forecast for Germany still expects the German economy to pick up over the course of next year.

The expansionary fiscal stance will then begin to clearly support GDP growth and private demand will also slowly regain momentum. 

It is estimated that additional government spending on defence and infrastructure will contribute 1.3 percentage points to GDP growth by 2028. Furthermore, transfers and tax cuts will boost the incomes of households and firms.

Social security funds will see a sharp rise in expenditure alongside substantially higher contribution rates.

Exports will gradually embark on a recovery path next year but owing to reduced competitiveness will reap only limited benefits from a return to a more vibrant global economy. Businesses will also increase their investment again somewhat later.

Overall, the German economy will grow slightly this year by 0.2 % (calendar-adjusted), somewhat more strongly by 0.6 % next year and by a substantial 1.3 % in 2027. As the number of working days will increase over the next two years, unadjusted GDP rates will then be somewhat higher at 0.9 % and 1.4 %.

It will continue to grow in 2028, but will lose some momentum, with GDP growing at a rate of 1.1 % in calendar-adjusted terms. Capacity utilisation in the German economy will then be high again and the labour market will become tighter.

Expansionary fiscal policy will have hardly any impact on potential output over the forecast horizon. Given the persistence of structural barriers to growth, its growth rate is estimated to be only 0.4 % per year over the forecast horizon.

The inflation rate will continue to decline over the forecast horizon, but at a slower pace than previously expected. One factor here is that strong wage growth will ease only slowly.

The HICP rate is expected to decrease from 2.3 % this year to 2.2 % next year, reaching around 2 % in 2027 and 2028. 

Given the expected macroeconomic environment, inflation would be expected to rise somewhat in 2028. However, this will be dampened by the switch from national CO₂ emissions trading to the EU ETS2 system, as a lower carbon price is assumed here for a time. 

The general government deficit ratio will rise sharply overall, from 2.5 % in 2025 to 4.8 % in 2028. The debt ratio will increase to 68 %. 

The risks to the forecast tend to be tilted to the downside for GDP and to the upside for inflation.

Economic output in Germany declined somewhat in the preceding summer half-year. In seasonally adjusted terms, real GDP fell by a cumulative 0.2 % in the second and third quarters, slightly more strongly than expected in the Bundesbank’s June 2025 Forecast for Germany. 1 The German economy thus suffered a further setback. According to national accounts data, which were revised in the third quarter, it has clearly been in a recession since the end of 2022 but has recovered somewhat since mid-2024, however. 2 As a result of US trade policy and the introduction of far-reaching US tariffs, exports to the United States dropped sharply in the third half of the year, but the overall decline in exports was significantly less than expected. Business investment was also somewhat more robust. Uncertainty stemming from US trade policy is likely to have had less of a dampening effect than feared. 3 Nevertheless, industrial output fell markedly. Construction, in particular, was weaker than expected in the June forecast, as housing investment suffered a further sharp decline. Private consumption also fell short of the forecast, even though the labour market proved somewhat more stable. Gains among service providers almost offset a further reduction in jobs in the manufacturing industry. At the same time, there was a surprisingly sharp rise in actual wages. This is particularly true of some services sectors with comparatively robust economic and labour market conditions. This is likely to have contributed to the fact that HICP inflation rates were also well above the June forecast recently. Core inflation (excluding energy and food), in particular, surprised to the upside. 

The Germany economy is gradually returning to a recovery path. 4 GDP is initially expected to rise only slightly in the 2025/26 winter half-year. Exports are therefore likely to pick up somewhat after the tariff-related burdens and industry is likely to stabilise. Some service providers will probably see further growth, too. There are also some initial signs of an increase in government orders. However, according to the available leading indicators, the expected fiscal easing is not set to already provide any significant boost to the economy as a whole in the short term (see the section “Details of the short-term GDP forecast”). The expansionary fiscal policy will only play a significant role later in the forecast horizon. Additional defence and infrastructure spending will strongly drive up government investment and additional defence spending will also be reflected in higher government consumption. 5 The cumulative overall effect of this spending on annual GDP growth is estimated to be + 1.3 percentage points between 2025 and 2028. 6 Fiscal policy will also support economic activity through further measures (see the section “Fiscal assumptions”). From the second quarter of 2026, GDP growth will accelerate markedly. Fiscal stimulus is a key prerequisite here but a revival in household demand is important, too. Exports will slowly return to an expansion path over the course of next year. Global trade and foreign demand will then see significant growth again (see the section “Assumptions regarding the international environment, exchange rates, commodity prices and interest rates”). Given the deterioration in its competitiveness, the German export industry will see only limited benefits from this. Private residential investment will also start to recover in 2026. Strongly rising wages and a gradual improvement in the labour market will underpin households’ real disposable income and thus moderate growth in their consumption. With increased capacity utilisation, businesses will also invest more again. However, this will not be noticeable until 2027. The pace of the annual average GDP expansion will then accelerate significantly. Momentum will decline towards the end of the forecast horizon, however, mainly as domestic household demand loses impetus. Higher interest rates will then curb investment and a sharp rise in social contribution rates will dampen disposable income and private consumption (see the section “Forecasts of expenditure components of GDP”).

The German economy will therefore see increasingly stronger growth by 2027 before losing momentum slightly in 2028. Calendar-adjusted real GDP will rise by 0.2 % this year, by 0.6 % in 2026, by 1.3 % in 2027 and by 1.1 % in 2028. With regard to quarterly growth rates, note that these are fairly steady over the forecast horizon. However, as expected investment in defence will play an important role in GDP growth, actual GDP growth may be significantly more volatile. This is because investment in defence is recorded in the national accounts at the time of delivery. It is difficult to make a precise on-the-quarter forecast here, especially in the case of armaments, and significant fluctuations across quarters are possible if deliveries are not evenly distributed over time.

Compared with the June Forecast for Germany, GDP growth has been revised slightly upwards for 2025 and 2027 and slightly downwards for 2026. This year, this is due to the more favourable start to the year as a result of the upward revision of GDP data at the end of 2024 and the beginning of 2025. For one thing, the export forecast has been revised somewhat downwards for 2026. This reflects the stronger euro and slightly weaker expansion in foreign demand. For another, private housing construction will see somewhat less growth. By contrast, real government demand will grow somewhat more strongly in 2026 and 2027 than expected in June.

Aggregate production capacity utilisation will improve again. The German economy will grow significantly more strongly than its potential output, for which, as in June, a growth rate of only 0.4 % per year is estimated over the forecast horizon. The currently still significantly negative aggregate output gap will thus close over the forecast horizon and production capacity utilisation will be at a favourable level again in 2028. Potential growth will remain subdued owing to varied structural barriers to growth at home and abroad. It will be hampered, amongst other things, by the shortage of skilled workers and rising unit labour costs in the context of demographic change, higher bureaucratic burdens or increased international competition faced by the German export industry, especially from China, as well as the growing fragmentation of the international environment. Many of these factors are also expected to weigh on potential output growth beyond the forecast horizon. The additional government investment in infrastructure will probably continue to have an impact on the economy as a whole across the forecast horizon. This is because it will be financed from the new Infrastructure and Climate Neutrality Fund, which will provide a total of €500 billion over a period of 12 years. However, only around half of this is likely to be used for additional infrastructure investment. The long-term growth effects, i.e. the impact on the potential output of the German economy, are therefore very limited up to 2028 and modest beyond the forecast horizon as well (see the supplementary information “Impact of additional government infrastructure spending on German potential output"). 7 The Bundesbank’s estimates assume that the level of potential output in 2035 will be 0.35 % to 0.5 % higher owing to additional infrastructure investment. Additional defence spending is likewise not yet expected to increase potential output growth over the forecast horizon. 8

The government deficit and debt ratios will rise significantly as a result of additional defence spending and non-military investment as well as other fiscal measures. The deficit ratio will still fall slightly this year, however. The steep rise in social contribution rates and perceptible growth in tax revenue will more than offset expenditure growth. From 2026 onwards, the more accommodative fiscal stance will then lead to a significant increase in the deficit ratio. This is not only due to additional spending on defence and non-military investment, especially in infrastructure, including digitalisation. In addition, there will be revenue shortfalls due to various tax cuts and additional expenditure as a result of transfers (see the section “Fiscal assumptions”). Social security spending will also go up steeply, but this will be largely offset by additional revenue from a significant rise in contribution rates. Overall, the deficit ratio will increase from 2.5 % this year to 4.8 % in 2028. Particularly in 2028, the borrowing limit under the national debt rule will be significantly exceeded, leaving a need for action. The Maastricht debt ratio will grow from 63 % in 2025 to 68 % in 2028 (see the section “Outlook for public finances”).

The labour market will gradually improve over the forecast horizon, with only limited growth in employment but a marked decline in unemployment. The labour market is not expected to strengthen in the short term. The divergence between the fairly robust services sectors and the manufacturing sector, which is experiencing structural challenges, will initially persist (see the section “The short-term forecast for the labour market”). As the economic recovery takes hold, existing staff will initially be put to greater use in 2026. Working hours and labour productivity will rise again. Employment will remain at the same level for the time being. At the same time, unemployment will begin to decline, as the labour supply will then already be receding for demographic reasons. The increasing participation rate and – now considerably reduced – immigration will no longer be able to offset the negative demographic impact. 9 Only in 2027 will demand for labour be so high that employment grows as well. However, the decline in labour supply will then be so strong that the scope for higher employment remains tightly limited. Unemployment will then fall faster than the labour supply. However, ongoing structural changes will change professional and qualification-related requirements. This will make it more difficult to align the skills supply and demand. Unemployment will therefore fall markedly in 2027 and 2028 but will not yet return to its low pre-pandemic level by the end of the forecast horizon. As a result, the shortage of skilled workers and the labour market tightness will intensify again significantly. 

Actual earnings will initially continue to rise steeply and decelerate much more slowly than previously expected. The rise in negotiated wages will decline sharply this year at a rate of 2.5 % and increase again somewhat temporarily to 3 % in 2026 (see “The forecast for negotiated wages in this year and the next"). In 2025, the weak economic activity and, in some cases, a significant deterioration in the labour market as well as the discontinuation of inflation compensation bonuses are impacting on the economic sectors included here. 10 By contrast, the growth rates of actual earnings did not decline in the past summer half-year as had been expected. Wages grew steeply, especially in some of the services sectors with comparatively robust economic activity and persistent shortages of skilled workers. Moreover, these areas are not included in the negotiated wage statistics, or only partially, as fewer workers are covered by collective bargaining. 11 In addition, there were other one-off factors. 12 Wages in these services sectors are likely to rise much more strongly next year than in sectors bound by collective agreements. The sharp increase in the minimum wage will also contribute to a positive wage drift. 13 However, the one-off factors will not continue to the same extent. Actual wages will rise by 4.7 % in 2025 and by 4.0 % in 2026 overall. The forecast has thus been revised upwards unusually sharply since June. 14 In 2027 and 2028, negotiated wage growth, at 2.7 %, will likewise be well above the long-term average. With around 3 % per year, the rise in actual wages will be even stronger. This is due to lower unemployment, the increasingly widespread shortage of labour and the associated rise in working hours for employees. 15 Compensation per employee will rise significantly more substantially than actual earnings in 2028. This is due to the substantially higher social contribution rates, which also increase employers' non-wage costs even further (see the section “Fiscal assumptions”).

Unit labour costs will rise sharply over the forecast horizon and weigh on firms’ profit margins. The sharp rise in unit labour costs will ease from 4.8 % this year to 2.0 % in 2027, as wage growth calms and labour productivity rebounds markedly. Aggregate profit margins will partly cushion the cost surge at first. However, this does not apply to sectors that are benefiting to a particularly large extent from higher government spending. Some of these are already well utilised and additional demand is likely to be accompanied by significant price increases, especially in the defence industry, but also – to a lesser extent – in some parts of the construction sector. Profit margins will therefore recover somewhat in 2027. However, unit labour costs will pick up again in 2028 owing to the sharp rise in social contribution rates. Enterprises will partly compensate for these by reducing profit margins. Overall, domestic inflation as measured by the GDP deflator will decline only gradually over the forecast horizon, from 2.8 % in 2025 to 2.3 % in 2028. This means that it will remain somewhat elevated throughout.

Inflation is set to fall more slowly than previously expected, reaching around 2 % in 2027 and 2028. Annual HICP inflation will gradually decline from a projected 2.3 % this year to 2.2 % in 2026. At the same time, core inflation (HICP inflation excluding the volatile components energy and food) will sink from 2.8 % to 2.4 % (see the section “Inflation forecast up to 2026”). In 2027, it will decline further to 2.1 % as growth in labour cost dwindles and weak aggregate demand continues to have an impact. As aggregate capacity utilisation increases and unit labour costs rise more sharply once more, it will pick up again slightly to 2.2 % in 2028. Wage growth, which is still strong, is set to contribute to marked increases in food prices over the forecast horizon. The decline in energy prices will slow by 2027, mainly because the downward pressure on energy commodity prices is expected to ease. The transition from the national emissions trading system (nETS) to the EUETS2 in 2028 will be accompanied by another significant decline in energy prices in Germany. This is because, according to the Eurosystem’s harmonised assumption, the European carbon price will be lower in 2028 – the year it is introduced – than the national carbon price in Germany in 2027 (see the supplementary information “Impact of the introduction of the EU Emissions Trading System 2 on consumer prices"). Overall, headline HICP inflation is forecast to drop to 2.1 % in 2027 and 1.9 % in 2028. Without the effect of the changeover to the EU ETS2, it would be roughly as high in 2028 as in 2027. 

Compared with the June forecast, the forecast for headline HICP inflation has been revised upwards, especially for 2026. This is mainly because energy prices have fallen less sharply since, contrary to the assumption in the June forecast, the electricity tax cuts for households announced in the coalition agreement are not being implemented; moreover, subsidies for grid charges are smaller. In addition, underlying inflation was unexpectedly strong, partly owing to the surprisingly sharp rise in wages and the associated upside surprise in the core components of the HICP (see the section "Inflation forecast up to 2026"). 

The forecast presented here is subject to a degree of uncertainty. Especially when it comes to international trade disputes and geopolitical conflicts, developments could intensify or tend towards easing. With regard to German fiscal policy, plans to increase expenditure could be implemented more slowly than intended; however, an even more expansionary stance is equally possible. In addition, there are risks regarding the macroeconomic impact of demographic change and the changeover of carbon trading to the EU ETS2. Overall, risks to economic activity tend to be tilted to the downside, while risks to inflation are predominantly to the upside.

There is still a high degree of uncertainty about how international trade disputes will play out. The trade agreements between the United States and the EU in August gave firms greater planning certainty in terms of global trading conditions. 16 However, this remains challenging. The trade dispute between the United States and China has also eased somewhat of late, but could still escalate further owing to the provisional nature of the agreement. German firms could bear the brunt of such a situation, especially if China were to impose extensive export restrictions on rare earths and other intermediate inputs. In all likelihood, a supply shock such as this would dampen GDP growth in Germany and raise inflation. At the same time, there is a still a chance that the US Supreme Court could rule certain punitive tariffs imposed by the US President illegal on the grounds that they exceed executive authority. As a result, tariffs could be reduced or even suspended. 17 This could then see German exports and economic output rise more sharply than expected.

Geopolitical conflicts are at risk of intensifying but could also have the potential to ease. For instance, there could be a ceasefire in Ukraine if ongoing diplomatic efforts are successful. If sanctions against the Russian energy sector were to be eased or attacks on the energy infrastructure of the two countries were reduced, commodity prices would be expected to decline gradually. On the other hand, the situation could also worsen, thus triggering upward pressure on key commodity prices. A potential conflict between the United States and Venezuela could also play a role. Overall, however, from today’s perspective,it is downside risks to international oil and gas prices that are likely to predominate until 2027. This assessment is based mainly on signs of an oil glut and the strong ongoing expansion of global liquefied natural gas export capacities. 18 If energy commodity prices turn out to be lower, this would stimulate German economic activity to a given point and dampen inflation.

There is considerable uncertainty surrounding the economic stimulus provided by fiscal policy. This entails both downside and upside risks to the GDP forecast. For example, it is currently unclear how central government intends to deal with the urgent need for action to ensure compliance with national fiscal rules by 2028. The stimulus to the economy stemming from government measures will also depend heavily on how much additional spending on defence and non-military investment actually takes place. On the one hand, past experience suggests that the outflow of funds will be fairly slow. On the other, efforts are being made to reduce non-financial barriers posed by regulation or approval processes. A stronger outflow of funds could lead to higher price pressures than assumed, as capacity bottlenecks in individual sectors such as the defence industry or civil engineering are then likely to be even larger. This would probably boost the increase in the GDP deflator, but would not necessarily have a major impact on consumer prices. 

Risks to the expected recovery would emerge if, for example, labour costs increase even more significantly owing to even larger burdens caused by demographic developments. The assessment of wage growth at the current end is surrounded by unusually high uncertainty at present. The baseline for the forecast assumes that the unexpectedly strong wage growth in the first three quarters of this year is largely down to one-off effects and that wage dynamics will therefore decline markedly in the coming years. However, the persistence of these one-off effects cannot be conclusively confirmed based on the data available. There is therefore a risk the labour market is actually more heavily influenced by structural factors, causing elevated wage inflation for longer. In particular, sectoral heterogeneity in terms of economic and labour market conditions, coupled with demographics, could lead to an even more acute shortage of skilled workers and thus to additional upward pressures on wages. Demographic developments are also a key driver of the sharp rise in social security spending and the associated pressure on non-wage labour costs. This pressure, too, could be stronger than assumed. If, on the other hand, measures to curb costs are implemented, the rise in social contributions could be smaller. If labour costs go up even more steeply, the overall impact on the German economy is likely to be negative: Labour demand and employment would be dampened, prices could rise more sharply and firms’ profit margins could be lower. The competitiveness of the German export industry would continue to decline, meaning that the export market share losses 19 would probably be even greater than anticipated in the forecast. Business investment would also be curbed. Finally, a weaker labour market and higher inflation would weigh on private consumption.

In 2028, the inflation rate is subject to risks surrounding the changeover to the European Union Emissions Trading System EUETS2. If the introduction of the EUETS2 were to be delayed further, the national carbon price would still apply in 2028 and the expected dampening effect on the HICP rate would be eliminated. Even if the transition to ETS2 is successful, this effect could turn out to be smaller. This is because the carbon price is to be set by the EUETS2 in the market with a cap on allowances, and there is no guarantee that it will be possible to fully achieve the desired limit on the carbon price. It should also be noted that the assumed carbon price will probably be too low for Germany’s national climate targets to be met (see the supplementary information “Impact of the introduction of the EU Emissions Trading System 2 on consumer prices"). 

The Forecast for Germany is based on joint assumptions by Eurosystem experts about the global economy, exchange rates, commodity prices and interest rates. These assumptions are based on information that was available as at 26 November 2025.

So far, the global economy has proven more resilient to US tariffs than expected in the June forecast, but growth will weaken next year. 20 The global economy grew solidly overall in the second and third quarters of the year, and somewhat more strongly than assumed in the June forecast. Robust GDP growth in the United States and China played a major part in this. Since the June forecast was finalised, the US Administration has, on the one hand, agreed with several trading partners on more moderate tariffs than originally threatened, but has also introduced or increased sectoral tariffs. 21 The average rate for US tariffs is considerably higher than at the beginning of the year, and trade barriers are expected to continue to weigh on the global economy. After global GDP growth of 3.5 % this year, a rate of 3.3 %, which is slightly lower by long-term standards, is expected for the period from 2026 to 2028. It is also assumed that the 15 % tariff rate that applies to most US imports of goods from the EU under the trade agreement between the United States and the EU will remain in place. 22  

Economic growth in the other euro area countries will be slightly better than assumed in the June Forecast for Germany. The economic growth figures in the other euro area countries used in the forecast are derived from the forecasts of the national central banks, which were incorporated into the projection for the euro area published by the ECB on 18 December 2025. 23 Particularly this year, economic growth in the euro area excluding Germany is significantly higher than in the June forecast, at a rate of 1.9 %. Momentum will weaken somewhat next year, but will remain slightly higher than in the previous forecast, with a growth rate of 1.4 % in 2026. Growth of 1.4 % is likewise expected in 2027 and 2028 respectively. In 2027’s case, this is the same as in the June forecast.

US trade policy is weighing on global trade and dampening the expansion of German sales markets. Protectionist US trade policy and the associated remaining uncertainty had a significant impact on US foreign trade. US import demand was initially bolstered after the first tariffs were announced and further steps were expected, but slumped significantly in the second quarter. The remaining global trade in goods has so far held up well overall. Imports from a number of emerging market economies rose significantly, especially in the second quarter. Global trade will likely be negatively affected by US trade policy in the current winter half-year before picking up again somewhat over the course of next year. After averaging 4.4 % this year, growth in 2026 is therefore expected to be significantly weaker, at 2.0 %. It will pick up again at 3.1 % in both 2027 and 2028, but will fall short of growth in the global economy. Over the next three years, German exporters’ sales markets are likely to expand broadly in line with global trade.

The assumptions relating to exchange rates, commodity prices and interest rates are shown in the following table and chart.

Key aspects of the macroeconomic outlook

The forecast incorporates fiscal policy measures as soon as they are sufficiently specified and their implementation is considered likely.

Defence spending will rise significantly over the forecast horizon. By 2028, it will increase by 1¼ percentage points relative to GDP compared with 2024. The NATO spending ratio is thus expected to reach around 3¼ % in 2028. From 2026 onwards, expenditure on military weapons systems, ammunition and personnel in the Federal Armed Forces, in particular, will rise steeply. In addition, transfers to Ukraine are assumed to remain at around ¼ % of GDP per year over the entire forecast horizon.

Non-military government investment will increase markedly by 2028. Its share of GDP will then be just over ½ percentage point higher than in 2024. From 2026 onwards, there will be a significant rise, in particular, in construction investment in rail and road infrastructure as well as in educational institutions. In addition, there will be greater investment in digitalisation. This investment will be boosted by funds from the Infrastructure and Climate Neutrality Fund. This forecast assumes that additional non-military government investment (compared with 2024) will rise significantly less sharply than borrowing by the Infrastructure and Climate Neutrality Fund. First, central government is planning only relatively minor additional non-military investment of its own. It is creating scope for other expenditure by shifting budget items from the core budget to the Infrastructure and Climate Neutrality Fund. Second, the debt-financed grants from the Infrastructure and Climate Neutrality Fund to the federal states and the Climate Fund will probably only fund a very limited volume of additional investment. The federal states have not committed to such an increase. A large part of the financial resources in the Climate Fund will be spent on the subsidy for transmission grid charges. 24

The forecast takes various tax cuts and additional transfers into account as further fiscal policy measures. The volume will amount to ¼ % of GDP in 2026 and ¾ % of GDP in 2027 and 2028. One focus of the measures is on easing the burden placed on firms and households by energy prices. In particular, from 2026 onwards, there will be a general government subsidy for transmission grid fees. From 2027, electricity costs in energy-intensive industries (the industrial electricity price) will be subsidised retroactively, starting from 2026. In addition, central government has extended the reduction in electricity tax for the manufacturing and agriculture sectors beyond 2025. This is flanked by temporary accelerated write-offs for profit-related taxes and a reduction in corporation tax in 2028. Besides this, cutting VAT on food and beverage service activities to the reduced rate also plays a major role. Other tax measures such as raising the standard travel allowance will also lead to lower revenue. From 2027 onwards, additional expenditure will be incurred because the “mothers' pension” has been expanded. 25

The overall contribution rate to the statutory social security schemes will rise by 3½ percentage points to 44½ % by 2028. This is necessary because wages subject to compulsory insurance contributions are going up significantly more slowly than social security spending. The rapid increase in expenditure is due to demographic developments and benefit increases. The overall contribution rate is already set to grow by almost 1½ percentage points to 42.4 % in 2025 – largely owing to higher contribution rates for the health insurance scheme. In 2028, the contribution rate for the statutory pension insurance scheme will then surge by 1.1 percentage points to 19.7 %. The pension insurance scheme will still be able to fund its growing deficits from the available reserves until 2027. In 2028, the reserve would fall far short of its minimum requirement, meaning that the contribution rate needs to rise sharply as the legal situation currently stands. 26 In addition, the contribution rates for the health insurance scheme will rise further, especially from 2027 onwards, and the contribution rate for the long-term care insurance scheme will increase markedly in 2028. 27  

Further measures will have only a marginal net impact on the government budget, as burdens and relief largely offset each other. For example, additional revenue from the progressive income tax scale will offset revenue shortfalls resulting from legislative changes such as the decision to compensate for bracket creep in 2026 and, from 2027 onwards, the assumed adjustment of income tax allowances to the inflation of the previous year. In 2026, revenue from the EU programme NextGenerationEU (NGEU) will cease; the government then assumes that it will continue to finance the spending from its own resources. Revenue from CO₂ emissions allowances will rise gradually. 28

Key aspects of the macroeconomic outlook

The deficit ratio is set to fall to 2.5 % in 2025 (2024: 2.7 %). The expenditure ratio has been rising significantly, but the revenue ratio has been increasing even more sharply, for several reasons. First, the contribution rates of the healthcare and long-term care insurance schemes have gone up substantially. Second, the payout period for tax-exempt wage components in the form of inflation compensation bonuses has ended. Third, various one-off effects have been having a positive impact on taxes, especially sharply rising revenue from withholding tax on interest income and capital gains as well as from inheritance tax. On the expenditure side, spending on pensions, healthcare and long-term care, in particular, has been rising sharply. In addition, compensation of employees has been increasing steeply.

The looser fiscal stance will cause the deficit ratio to rise, initially significantly, to 3.9 % next year. Thereafter, it will increase further to 4.6 % before reaching 4.8 % in 2028. The main reason for this is strong expenditure growth. Direct government demand will rise considerably: this concerns defence spending, non-military investment and spending by the healthcare and long-term care insurance schemes, which is primarily recorded as social transfers in kind. Monetary transfers will also increase, mainly as a result of higher pension expenditure. In addition, interest expenditure will grow, primarily on account of rising average interest rates on government debt. The revenue ratio will rise by far less than the expenditure ratio. The tax ratio will have a dampening effect here, particularly as a result of tax cuts. That said, social contribution rates will go up significantly in view of demographic pressures and expanded care benefits, above all in 2028 (for more information on tax cuts and social contribution rates, see the section “Fiscal assumptions”).

The structural deficit ratio will increase from just under 2 % in 2024 to 4¾ % in 2028. This excludes temporary effects and cyclical influences. The rise will be driven by growing deficits in central government (including its off-budget entities). These are mainly the result of the expansionary fiscal stance (see the section “Fiscal assumptions”). According to this forecast, central government will significantly exceed its borrowing limit under the debt brake in 2028. The Federal Government has not yet announced any measures that could address this clear and compelling need for action. By contrast, state and local governments combined will reduce their deficits. This is partly due to the fact that they are expected to use state government resources from the Infrastructure and Climate Neutrality Fund primarily for investment refinancing. The state governments had expressly refused to tie these funds to additional investment. Furthermore, central government will assume part of the revenue shortfalls resulting from adopted tax cuts. Also, given their current high deficits, local governments are likely to tighten their purse strings. 29  

The large deficits of local authorities mean that the Maastricht debt ratio will rise from 62.2 % at the end of 2024 to 68.1 % at the end of 2028. Social security funds experience temporary deficits. These are usually covered by reserves that are not invested in government debt instruments. They do not then raise the Maastricht debt level. In 2025 and 2026, however, central government is granting multi-year loans as an exception. It is borrowing to do so, temporarily raising the Maastricht debt level by ¼ percentage point. However, the German Maastricht debt ratio does not include the share of EU debt that Germany ultimately has to pay (especially for NGEU). At the end of 2028, this will stand at around 2½ % of GDP. 30  

Key aspects of the macroeconomic outlook

Economic output is likely to see subdued growth in the 2025/26 winter half-year. 31 German export-oriented industry, in particular, will remain under pressure. Encumbered by US tariffs and a worsened competitive position, export activity will initially continue to weaken, albeit probably only slightly. In addition, business investment is expected to decline amid still heavily underutilised capacity. In line with this, the business climate in the manufacturing sector deteriorated between the third and fourth quarters according to the ifo Institute. However, the S&P Global Purchasing Managers’ Index points to fairly robust output. Additionally, the slight upward trend in industrial new orders observed since last year does not appear to be fundamentally broken, despite dampening noticeably in the third quarter. 32 Industrial output is therefore likely to stabilise. In the construction sector, too, broadly sideways movement is expected in the short term. Although the business climate in this sector as surveyed by the ifo Institute recovered from its setback in the third quarter, there is still no sign of any major recovery. By contrast, the services sector is likely to provide a fresh boost to the economy. S&P Global’s Purchasing Managers’ Index also remained well above the expansion threshold up to the period’s end. However, private consumption is likely to provide only a moderate boost. Real government demand is expected to make a positive contribution to GDP growth in the winter half-year, too. 

While there are initial signs of increasing government orders, the leading indicators do not yet, overall, point to a marked economic recovery in the near future by way of higher government expenditure. In the main construction sector, for example, orders received by contracting authorities remained very sluggish until recently. A sharp rise did not come until September. 33 Domestic new orders in industry also remained very subdued up to September. It was only in the data released after the forecast was finalised that a spike could be observed in October, driven mainly by a large order in the other transport equipment sector, which comprises the manufacture of aircraft, ships and military vehicles. 34 This recent surge in orders in industry and construction is likely to be reflected in output with a certain lag, thus supporting the expectation of economic growth later in 2026. In the fourth quarter of 2025 and the first quarter of 2026, however, such an upturn will be counteracted by firms’ still predominantly pessimistic ifo business expectations. Although expectations have generally improved since the start of the year, they deteriorated somewhat recently.

Key aspects of the macroeconomic outlook

Exports are still suffering in the new trading environment and will not contribute to GDP growth again until the second quarter of 2026. Exports are likely to keep declining in the winter half-year, albeit only slightly. They will continue to be hit by the import tariffs imposed by the US Administration. 35 In addition, the euro has continued to appreciate in recent months. This is putting pressure on German exporters’ competitiveness alongside predominantly structural factors, such as increasing competition from China and worsening local business conditions, that have caused them to lose large shares in global markets in recent years. 36 These unfavourable conditions are also currently reflected in weak foreign demand for German export goods. Industrial new orders from abroad declined over the third quarter. Correspondingly, most of the exporters surveyed by the ifo Institute are currently pessimistic about the future. Exports are only likely to rise again starting in the second quarter of 2026. The headwinds resulting from euro appreciation should then ease and firms will probably have adapted better to the new trading environment. Exports will then benefit from the rebound in global trade and a return to significantly more dynamic growth in foreign demand (see the section “Assumptions regarding the international environment, exchange rates, commodity prices and interest rates”). However, they will pick up only moderate momentum, as the structural obstacles to growth in the German export industry will remain. Some will even become more severe. In particular, the sharp rise in non-wage labour costs over the forecast horizon will weigh significantly on domestic producers’ competitiveness. Government subsidies, such as the temporary reduction in the price of industrial electricity, will not radically improve this situation. Against this backdrop, export growth will continue to lag behind sales market growth over the remainder of the forecast horizon. 

Business investment is being throttled by a difficult investment environment and is only slowly gaining limited momentum. The underlying conditions for business investment are currently unfavourable: capacity in the manufacturing sector is significantly underutilised and private domestic demand for capital goods is correspondingly weak. Past uncertainty shocks are also likely to continue having an impact, albeit to a small extent. 37 As a result, the majority of the capital goods producers surveyed by the ifo Institute assess their current business situation as poor. Against this backdrop, business investment is likely to decrease somewhat further in the current winter half-year. However, the business expectations of capital goods producers suggest that the reluctance to invest will gradually fade next year. Although expectations are still predominantly pessimistic, they have improved of late and are currently at their highest level in just over three years. The Federal Government’s expenditure programmes could be having an effect here to some extent. In addition, the utilisation rate in the manufacturing sector is expected to increase further next year as export activity gradually rebounds, supporting investment propensity. Uncertainty effects are also likely to slowly subside completely. Business investment will therefore return to an expansion path in mid-2026. However, it will not boost growth noticeably until 2027. Moreover, the pace of growth will remain subdued overall and is already losing momentum by the end of the forecast horizon. This is because interest rates on loans to enterprises are at that point likely to go up somewhat in line with the expected rise in money and capital market rates. In addition, the competitive environment will remain difficult for German industry. Reducing the profit-related tax burden (more generous depreciation options and lower corporation tax rate) and energy cost-cutting measures are expected to improve investment conditions. However, increasing demographic pressures are working in the opposite direction – not least in the form of comparatively high wage pressures and sharply rising non-wage labour costs.

Private consumption will make a robust contribution to economic growth over the entire forecast horizon, but will lose some momentum in 2028. According to the revised national accounts data, private consumption in the first quarter was at a significantly higher level than assumed in the June Forecast for Germany. Starting from this point, it was then more sluggish than expected in the last summer half-year. In the third quarter, in particular, consumption declined significantly despite surprisingly strong wage growth, and the previously fairly low saving rate rose markedly. There is likely to be some countermovement in the current winter half-year, and private consumption should rebound somewhat. Some indicators remain weak, such as declining real sales and greater pessimism in the retail sector. But there are rays of hope, too. First, motor vehicle registrations have risen significantly in recent times, and second, the GfK consumer climate indicator, while still negative, is trending upwards. The saving rate is currently only slightly above its pre-pandemic level and is expected to gradually return towards that level. Aside from this, private consumption is expected to increase in line with real disposable income over the remainder of the forecast horizon. The general trend for this is a steep upward trajectory, as wages will go up faster than consumer prices. In addition, the economic recovery will boost the labour market. In 2028, however, private consumption will lose some momentum, as higher social contribution rates will lower disposable income and also slow down net wage growth.

Residential investment will recover only moderately over the forecast horizon and later than previously expected. The recovery in private residential construction, which was still expected in June, did not materialise in the summer half-year. Instead, residential investment continued to decline. New orders and building permit numbers, which were previously rising, remained weak over the third quarter. However, they picked up again markedly in September, and growing demand for housing loans in the third quarter also continues to point to a gradual recovery. Ifo business expectations in housing construction have been improving for three quarters already. Despite this improvement, however, half of housing construction firms were still reporting a lack of orders when most recently surveyed, according to ifo. The recent rise in financing costs could play a role here. Overall, demand still appears too weak to trigger a noteworthy rise in residential construction activity in the short term. Against this backdrop, this period of weakness is likely to continue in the fourth quarter. Generally speaking, though, a recovery is still expected, and from 2026 onwards, positive demand signals should increasingly be reflected in increasing housing investment. The recovery over the forecast horizon will be supported by rising real income and a robust labour market. The continued high demand for housing and modernisation is likely to support growth. The measures taken by the Federal Government as part of its “construction turbo” legislation to simplify permits and speed up procedures should also have a beneficial effect. In 2028, however, the increase in housing investment will slow down. This is due, first, to the assumed rise in long-term interest rates on loans for house purchase and, second, to somewhat weaker income growth among households.

Real government demand will rise substantially up to 2028. This is because of a significant increase in expenditure on defence, non-military investment and social transfers in kind. In 2025, government consumption has been rising primarily due to a further increase in non-cash benefits for healthcare and long-term care as well as a sharp hike in compensation for employees. This development is being curbed by government construction investment, which is growing only moderately in line with past intra-year developments. From 2026 onwards, spending on defence and non-military investment will rise significantly overall. Higher defence spending will lead primarily to greater machine and equipment investment in military weapons systems and increased government consumption as a result of higher personnel expenditure. Non-military investment growth will be on a far smaller scale; it will mainly involve infrastructure and digitalisation projects and fall under the categories of investment in machinery and equipment and construction as well as in other assets (see the section “Fiscal assumptions”). In addition, demographic developments and expanded care benefits will continue to drive up non-cash benefits for healthcare and long-term care. 

Real imports will rise significantly over the forecast horizon and contribute to a marked decline in the current account surplus. Real imports rose unusually steeply in the first half of the year. In addition to the appreciation of the euro and expanded inventories, frontloading effects resulting from feared countermeasures to US tariffs may also have played a role here. Imports lost considerable momentum in the third quarter. They are set to expand moderately in the current winter half-year. However, they will accelerate considerably again from the second quarter of 2026. This is due, first, to the strengthening of demand among households and firms. Second, government demand will rise sharply. In particular, rising government investment in machinery and equipment will be accompanied by increased imports. At the same time, export growth will be comparatively subdued. As the terms of trade will improve only slightly at the same time, the trade balance (as a share of nominal GDP) will fall significantly in 2025 and 2026 and will continue to decline somewhat thereafter. The current account surplus will also decrease considerably over the forecast horizon, from an expected 4.7 % in the current year to 3.2 % in 2028.

Key aspects of the macroeconomic outlook

The labour market is currently characterised by job reductions and the simultaneous shortage of skilled workers, driven by strong structural change in conjunction with unfavourable demographics. The decline in employment expected for the summer half-year in the June Forecast for Germany was milder than expected. 38 Despite the notable reduction in jobs – especially in the manufacturing sector but also in trade – many firms are hesitant to fully adjust their headcount to the tense economic situation. This leads to low labour productivity and subdued working hours. This is also true, for example, of the construction sector with its many bottleneck occupations, where headcounts have already stabilised over the course of the year in anticipation of infrastructure renewal projects. Therefore, there are large internal reserves that can improve labour productivity and increase working hours in the short term as the economy begins to recover. The relatively stable trajectory of total employment so far is largely due to the high labour demand in public services, specifically the area of healthcare and long-term care above all. Total employment is likely to decline marginally in the current winter half-year. Leading indicators of employment back up this view, with the level of new job vacancies being exceptionally low. According to the ifo employment barometer, the employment plans of the industrial sector for the next three months remain deep in contractionary territory. However, the broader employment barometer of the IAB, which also includes non-commercial services such as health, education and public administration, is holding up much better. It does not foresee any sharp decline in employment in the coming months in aggregate terms. However, unemployment is likely to start falling soon as the labour supply declines. This is also indicated by the IAB unemployment barometer, which has risen slightly above the neutral threshold over the past six months. 

Key aspects of the macroeconomic outlook

Negotiated wage growth in 2025 is significantly weaker than in the previous two years. New wage agreements since the June forecast have been similar to those expected at the time. In addition to weak economic activity and lower price increases compared with previous years, the discontinuation of inflation compensation bonuses is dampening annual average wage growth. 39 Trade unions’ wage demands have declined markedly since the peak of inflation, along with the percentage of their demands they achieved. On average over the current year, the expected increase in negotiated wages is 2.5 %. As economic activity and the labour market are improving only gradually and inflation is on a downward trend, new deals should still be moderate overall next year, especially in industry. Wage agreements with higher wage increases are likely to appear only with a time lag. In 2026, however, the dampening base effect of inflation compensation bonuses will no longer apply. The permanent incremental increases from older collective wage agreements will then have a greater impact on wage growth, and the rate will thus rise temporarily to 3.0 %.

Key aspects of the macroeconomic outlook

The inflation rate rose in November, partly due to a base effect. Consumer price inflation, as measured by the HICP, stood at 2.6 % in November, 0.4 percentage point above the rate expected in the June Forecast for Germany. This was mainly due to unexpectedly sharp rises in prices for services and industrial products excluding energy. This was caused by both the volatile components and the surprisingly large rise in actual earnings. By contrast, energy prices unexpectedly continued their descent in November owing to falling gas prices. Food price inflation was also somewhat below the forecast, as prices for processed foods, especially dairy products, fell.

Over the next few months, the HICP rate is expected to fall to slightly above 2 % and then fluctuate around this level. Energy prices are expected to fall again next year. The reduced electricity price due to lower transmission grid fees, the abolition of the natural gas storage levy and the assumed decline in prices in the energy commodity markets are forecast to overshadow the rise in the carbon price at the beginning of the year. 40 The dynamics of services prices should decline somewhat compared with the previous year, but remain elevated. Prices for government services are likely to rise, mainly at the beginning of the year, owing to the price increase for the Deutschlandticket from €58 to €63. By contrast, the reduction in VAT on food and beverage service activities, which is also planned for January 2026, is likely to be passed on to consumers only to a limited extent. 41 On top of this, rents are still expected to rise above average by historical standards next year, as existing rents are only slowly adjusting to the cost surges of recent years. Overall, however, services inflation is likely to decline next year owing to somewhat easing wage cost pressures. Prices for non-energy industrial goods are likely to rise less strongly again next year than the historical average. Here, the still weak economic activity, the appreciation of the euro and declining import prices lead to lower price pressures. 42 Food price inflation is expected to be similar to this year as, although retail wages are likely to rise somewhat more strongly, agricultural producer prices are assumed to have declined.

From the beginning of next year onwards, it should be noted that actual inflation rates may also deviate from the forecast because the HICP classification is being changed in all euro area countries. 43  The December forecast is based on the previous HICP classification. The changeover will not affect energy price developments and the overall HICP. However, for food, non-energy industrial goods and services, there may be differences in historical index trajectories that – had they been known at the time the forecast was finalised – could also have had an impact on the forecast. In addition, new product groups are being taken into account, including gambling, which may have dynamics that deviate from the overall rate and can thus influence the results. 

Compared with the June forecast, the inflation rate is revised markedly upwards in 2026. At 2.2 %, the forecast for the inflation rate for 2026 is revised upwards significantly compared with the June forecast. One reason for this is that energy prices have fallen less sharply as originally expected because, in contrast to the assumption made in the June forecast, the electricity tax cuts for households announced in the coalition agreement have not been made; moreover, grid charges have received far fewer subsidies. A second reason is that the core rate excluding the volatile energy and food components is also likely to be significantly higher than originally expected, at 2.4 %. This is mainly due to the surprisingly strong dynamics of industrial goods and services prices over the past few months. 

Key aspects of the macroeconomic outlook

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