Non-final working translation

The German economic recovery, which had just begun in the winter half-year, will initially be slowed by the war in the Middle East. The sharp rise in energy prices will dampen households’ purchasing power and consumption expenditure. It will also weigh on firms’ costs. In addition, firms will also face increased supply bottlenecks and, in many cases, weaker demand. Elevated uncertainty and higher interest rates will be a drag on private investment. 

Expansionary fiscal policy will be the only thing preventing a decline in gross domestic product (GDP) in the summer half-year. It will provide a strong boost to growth through to the end of the forecast horizon: the cumulative contribution to GDP growth up to 2028 is estimated to be around 1.3 percentage points. Rising defence expenditure will be particularly important here.

After the weak summer half-year, economic activity will gradually gain momentum. It will be supported not only by continued fiscal expansion but also by falling energy prices and an improving global economy. Calendar-adjusted real GDP will rise by 0.5 % in 2026, 0.8 % in 2027 and 1.4 % in 2028. As this year and next will have more working days, unadjusted GDP rates will then be somewhat higher (2026: 0.7 %, 2027: 0.9 %), but a little lower (1.2 %) in 2028.

This means that aggregate capacity utilisation will gradually improve again. That is because the German economy’s potential output will grow at significantly slower rates of between 0.4 % and 0.3 % per year. Structural barriers such as a shortage of skilled workers, comparatively high labour and energy costs and stiff global competition persist and are dampening potential growth. 

The government deficit ratio will increase from 2.8 % in 2025 to 4.9 % in 2028. The debt ratio will climb to nearly 70 %.

The labour market recovery will be postponed: employment will initially fall slightly and will not rise markedly again until mid-next year. 

Wages will continue to rise steeply, albeit at a markedly weaker pace than before. Nonetheless, non-wage labour costs will go up sharply – especially in 2028. Domestic price pressures from labour costs will therefore ease only temporarily.

The energy price shock will initially push up inflation: the inflation rate as measured by the HICP will rise to 2.9 % in 2026 and then fall only slightly to 2.7 % in 2027. Only in 2028 will it come down significantly to 1.9 % – due in part to the price-dampening changeover of the national carbon price to the EU ETS2. Core inflation excluding energy and food will fall only slowly from a high level. In this context, lower growth in unit labour costs this year and next year will be counteracted by perceptible indirect effects of rising energy prices.

Risks are clearly tilted to the upside for inflation and to the downside for economic activity: an even stronger energy price shock in connection with the situation in the Middle East, in particular, could significantly dampen GDP growth and raise inflation sharply.

The Bundesbank finalised the Forecast for Germany on 27 May 2026. It was incorporated into the projection for the euro area published by the ECB on 11 June 2026.

In the last winter half-year, the German economy had transitioned more clearly onto a path of recovery than anticipated. After seasonal adjustment, GDP rose by a cumulative 0.6 % in the fourth quarter of 2025 and the first quarter of 2026, and by markedly more than had been expected in the Bundesbank’s December 2025 Forecast for Germany. 1 Manufacturing, in particular, solidified more strongly than suggested six months ago by the leading indicators. Its value added grew perceptibly, and exports also rose markedly. As industrial activity improved, firms kept their investment more stable than expected. In addition, household consumption expenditure was somewhat buoyant and government spending significantly more lively than projected. However, the stronger rebound in activity has not yet had any impact on the labour market. 2 The labour market even weakened slightly more strongly than expected, and strong wage growth slowed down somewhat more quickly. Consistent with this, the inflation rate – as measured by the Harmonised Index of Consumer Prices (HICP) – declined slightly more sharply up to February than projected. 3 In March, however, it rose markedly to 2.8 % as a result of the outbreak of the war in the Middle East and the sharp rise in crude oil prices, thus exceeding expectations by 0.7 percentage point. 

The consequences of the war in the Middle East are initially throttling the economic recovery. The impact of the war is a perceptible drag on the German economy. This is already the case in the forecast baseline, which assumes that the conflict will calm quickly and that crude oil prices will already go back down markedly in the second half of the year. This assumption follows the expectations priced in on the futures markets as at the cut-off date 4 (see chapter “Assumptions regarding the international environment, exchange rates, commodity prices and interest rates”). However, it also entails considerable risks, which are addressed, amongst other things, by means of an alternative scenario (see chapter “Risk assessment” and supplementary information "A severe risk scenario that covers the potential impact of the war in the Middle East on the German economy"). The disruptions to economic activity caused by the war are already considerable – and this includes Germany: sharp rises in crude oil and natural gas prices are eroding the purchasing power of households, who, in addition, are unsettled. They are therefore reining in their consumer spending. The price increases are also weighing on the cost side of firms, which are also facing increased supply bottlenecks and, in many cases, weaker demand. At the same time, heightened uncertainty is dampening business investment, which is also being constrained by markedly higher lending rates. These burdens are also impacting on private residential investment. Only in some areas of the export-oriented industrial sector will there probably be short-term bolstering effects, for example because demand for intermediate goods has gone up in anticipation of increasing supply bottlenecks, or individual economic sectors are benefiting from the fact that war-induced supply outages are affecting competitors from other countries even more severely. Overall, the headwinds caused by the war are likely to completely cancel out the impetus from expansionary fiscal policy in the current summer half-year. However, due to the latter, even in spite of the severe turmoil roiling the international commodity markets, GDP is set to still stagnate in the second quarter and rise slightly in the third quarter (see chapter “Details of the short-term GDP forecast”). 

Over the remainder of the forecast horizon, the German economy will gradually pick up considerable steam. This is because the effects of the war are assumed to fade away, with fiscal policy providing a strong boost. Energy prices will continue to fall, uncertainty will ease and the global economy will grow more strongly again (see chapter “Assumptions regarding the international environment, exchange rates, commodity prices and interest rates”). This means that, first, households’ real disposable incomes will start to go back up, and consumers will increase their consumer spending moderately. From mid-2027 onwards, they will increase their consumption even somewhat more strongly, because precautionary motives will then become less relevant as the labour market recovers and uncertainty eases. Second, exports will gradually pick up steam, even though they are lagging behind the pace of foreign demand growth owing to the German economy’s structural competitiveness problems. 5 Third, business investment will grow markedly again from 2027 and gain more momentum in 2028. It will be initially supported by fading uncertainty and then by a resurgence of capacity utilisation. Meanwhile, private residential investment will show a nearly unbroken moderate rise (see chapter “Forecasts of expenditure components of GDP”). The German economy will experience strong growth boosts throughout the entire forecast horizon as a result of the strong easing of fiscal policy. The cyclically adjusted government deficit ratio will rise by 2.4 percentage points up until 2028. This impulse is estimated to cumulatively contribute just over 1.3 percentage points to expected GDP growth in Germany between 2026 and 2028. The forecast contains an implied fiscal multiplier of almost 0.6. 6 Rising defence spending is set to be the most significant factor (see chapter “Fiscal assumptions”). 

The pace of macroeconomic expansion will thus accelerate from year to year. Calendar-adjusted real GDP will increase by 0.5 % in 2026, 0.8 % in 2027 and 1.4 % in 2028. 7 As 2026 and 2027 each have more working days than the previous year, unadjusted GDP rates will be somewhat higher at 0.7 % and 0.9 %, respectively. On the other hand, a negative calendar effect in 2028 will result in a somewhat lower rate of 1.2 %. 

Overall, GDP growth will be weaker than expected in December. Compared with the December 2025 Forecast for Germany, the GDP rate is revised downwards slightly for 2026 and markedly for 2027. On an average of the current year, the supporting effects of unexpectedly strong GDP growth in the 2025/26 winter half-year and the strains caused by the war in the Middle East are nearly balanced. The latter will have a much greater annual average impact for 2027. Growth rates for business investment, private consumption and exports, in particular, were revised downwards. In addition, the rise in government investment will be somewhat less dynamic. On the other hand, the GDP rate for 2028 is adjusted somewhat upwards. This reflects the lagged economic recovery. Household spending on consumption and investment, in particular, will then rise somewhat more strongly than in the December forecast.

Given weak potential growth, aggregate production capacity utilisation will gradually improve. Growth in the German economy’s potential output will be dampened by a large number of structural barriers to growth. These include demographic change and associated problems such as the shortage of skilled workers and rising non-wage costs as well as high energy costs, the burden of bureaucracy and regulation, and growing export competition, especially from China. Given that private investment has been sluggish for some time now, the capital stock is growing slowly. Against this backdrop and owing to the weaker forecast for investment, potential growth was reduced by 0.1 percentage point each for 2027 and 2028. It is now estimated to be 0.3 % in each of these two years, compared with 0.4 % in 2026. The expected GDP growth rates thus markedly exceed the weak potential growth, and the currently still significantly negative aggregate output gap will close over the forecast horizon. It will return to slightly positive territory in 2028.

The government deficit and debt ratios will rise significantly. Additional defence expenditure and non-military investment are not the only reasons. Others include various types of tax relief and transfers (see chapter “Fiscal assumptions”). Spending by the social security funds will also rise sharply. Towards the end of the forecast horizon, however, these will be financed increasingly by higher contribution rates. Overall, the deficit ratio will rise from 2.8 % in 2025 to 4.9 % in 2028. This means that Germany will significantly exceed both the EU reference value of 3 % from 2026 and that, in 2028, the central government will exceed the borrowing limit under the national debt rule. The deficits of the Infrastructure and Climate Neutrality Fund will only partially lead to higher investment. In the forecast horizon, only 40 % of the special fund’s expenditure will be channelled into additional non-military investment. 8 The Maastricht debt ratio will grow from 63.5 % in 2025 to 69.7 % in 2028 (see chapter “Outlook for public finances”). 

The labour market recovery is delayed. Employment is likely to decline slightly until the end of the year. However, the rise in unemployment is set to come to a halt somewhat earlier (see chapter “The short-term forecast for the labour market”). Only over the course of 2027 will demand for labour recover to such an extent that employment will also go back up. At the same time, the labour supply is declining so sharply that little room for job creation remains. 9 The strengthening economic recovery in 2027 and 2028 is thus being accompanied by rising hours worked and higher productivity. One particular factor is the increasing utilisation of that part of the workforce that had not been fully deployed in the past. Survey results show that some of the surveyed firms also expect productivity gains from the growing and more intensive use of artificial intelligence (AI). However, the extent to which these effects are confirmed remains to be seen. At the same time, firms’ aggregate assessment of the impact of AI on employment is neutral. 10 Unemployment will fall markedly until 2028. However, the rapid changes in professional and qualification-related requirements caused by structural change will make it difficult to reconcile skill mismatches. Unemployment is therefore not expected to return to its earlier low by the end of the forecast horizon, either. At the same time, the shortage of skilled workers will continue to increase.

Growth in actual earnings will decline, but will remain strong. Actual earnings still rose strongly last year, boosted in large part by one-off payments such as severance payments. This is indicated by a new survey of firms conducted by the Bundesbank (see supplementary information “The role of one-off payments in the rise in actual earnings in Germany in 2025 and 2026”). According to these findings, firms are also expecting these payments to be significantly lower in 2026. Smaller bonus payments will also have a wage-reducing effect in 2026. In addition, the latest wage agreements were comparatively low and weaker than expected in the December 2025 forecast. In industry, workers are willing to forego higher wage increases in order to keep their jobs. By contrast, labour-intensive services are particularly affected by the sharp increase in the minimum wage at the beginning of the year. Overall, actual earnings will rise by 3.5 % in 2026. Growth is thus markedly weaker than in 2025 and also somewhat lower than expected in December. The weaker wage agreements from the current year will continue to dampen the increase in negotiated pay rates in 2027 (see chapter “The forecast for negotiated wages in this year and the next”). As one-off wage-raising effects related to severance payments will no longer play a role next year, the increase in actual earnings will decline to 3.1 % in 2027. A more favourable economic situation and renewed tightness in the labour market will strengthen employees’ bargaining position in 2028 and indicate that wage agreements will then be higher again. Actual earnings will then rise at a slightly stronger rate of 3.2 %. However, this does not entail any major second-round effects of the energy price increase via the wage channel (for a definition of such effects, see supplementary information “Definitions of direct, indirect and second-round effects of an increase in energy commodity prices”). Compensation per employee will rise even 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 chapter “Fiscal assumptions”). 

Domestic inflation will ease somewhat, but remain consistently elevated. Unit labour cost growth will fall palpably from a strong 4.6 % in the previous year to 2.3 % by 2027. This is because wage growth is slowing and labour productivity is rising at a markedly stronger pace. Firms have potential to expand their profit margins somewhat in 2026 and 2027. This is partly because higher energy costs will filter through to sales prices significantly and, in some cases, even to a heightened degree. 11 Economic sectors that benefit particularly from higher government expenditure are also likely to see more pronounced price increases. However, growth in unit labour costs will accelerate strongly to 2.6 % in 2028 due to a sharp rise in social contribution rates. This cost surge should impact prices and dampen profit margins only partially. Overall, domestic inflation – as measured by the GDP deflator – will drop to 2.7 % in both 2026 and 2027 (from 3.0 % in the previous year), before falling to 2.3 % in 2028. Nonetheless, it will remain consistently elevated.

After breaching the 2 % mark significantly in 2026 and 2027 due to the sharp spike in energy costs, the inflation rate will fall to just under 2 % in 2028. The annual rate of HICP inflation will rise significantly to 2.9 % this year, up from 2.3 % last year. This is mainly due to higher energy prices stemming from the war in the Middle East (see chapter “Inflation forecast for 2026”). While the direct effects of higher energy commodity prices for fuel and heating oil have already largely filtered through to consumer prices, the pass-through to gas price inflation is expected to be slower. Over the remainder of the forecast horizon, this will somewhat counteract the decline in energy prices that is generally expected given the commodity price trajectory. Higher energy prices will also impact the prices of food, non-energy industrial goods and services after a time lag. Upward pressure on food prices will mainly stem from rising costs for agricultural production and logistics, particularly transport and storage. This is in addition to higher costs for energy-dependent inputs such as fertilisers. Heightened energy costs will also impact on non-energy industrial goods via energy-intensive production processes, logistics costs and more expensive inputs. Services will be affected by steeper energy prices in the travel segment above all, as well as via transport, heating or intermediate input costs, but the overall impact will be less pronounced than on goods. These indirect effects of elevated energy prices will counteract the initial decline in pressure from unit labour costs. As a result, the core rate for this year and next (excluding the volatile energy and food components) will fall at a significantly slower pace than we expected in December (for a definition of direct versus indirect effects, see supplementary information “Definitions of direct, indirect and second-round effects of an increase in energy commodity prices”). It will decline slightly at most from 2.6 % this year to 2.5 % next year. As energy commodity prices are also receding, the headline rate will fall at a slightly accelerated pace in 2027 to 2.7 %, before plummeting to 1.9 % in 2028. The decline in energy prices that is already anticipated in Germany in response to commodity prices will be temporarily amplified by the transition from the national carbon pricing system (nETS) to the EU Emissions Trading System (EU ETS2). 12 The core rate will also recede somewhat in 2028 as the indirect effects of higher energy prices subside. However, it will remain elevated at 2.3 %, reflecting the economic recovery and a renewed surge in unit labour costs.

Overall, the inflation outlook for 2026 and 2027 has been revised up significantly compared with the December forecast. The main factors at play are the direct and indirect effects of the recent surge in energy prices. The latter have also led to an upward revision of the core rate for all three years of the forecast horizon. 

The risks accompanying the Forecast for Germany are strongly influenced by the war in the Middle East at present. Developments in other geopolitical conflicts or a potential resurgence of trade tensions are also unpredictable factors at play. Domestically, the main sources of uncertainty are the pace and scope of increased fiscal policy expenditure, as well as the structural reforms signalled by the Federal Government. Overall, inflation risks are very clearly skewed to the upside, while those for economic activity are tilted considerably to the downside.

In particular, future developments in the Middle East and the international commodity markets pose substantial risks. This forecast assumes that the conflict will be resolved swiftly, with crude oil and gas prices easing in the near term (see the chapter entitled “Assumptions regarding the international environment, exchange rates, commodity prices and interest rates”). It is possible that the situation will de-escalate more quickly than forecast. However, in the event of a prolonged war and a continued rise in commodity prices, the outlook for inflation and the economy would worsen considerably. One reason is that higher energy commodity prices would rapidly and directly push up petroleum product prices. In addition, the indirect effects are likely to be more pronounced or last longer than our forecast assumes. Inflation expectations could also rise more sharply. This in turn could push up inflation via second-round effects (for a definition of such effects, see the supplementary information entitled “Definitions of direct, indirect and second-round effects of an increase in energy commodity prices”). Higher inflation would be a drag on economic activity, especially due to softer private consumption. Investment and exports would also suffer as a result of heightened uncertainty and weaker global economic activity. One such severe risk scenario for the German economy can be found in the supplementary information entitled “A severe risk scenario that covers the potential impact of the war in the Middle East on the German economy”. 

The exact scale of the fiscal stimulus and its impact are subject to some uncertainty. First, the Federal Government has announced extensive fiscal policy adjustments, although details have not yet been announced. Major income tax and social security reform is on the agenda. Moreover, significant action regarding the central government budget will be required to comply with the debt brake. The underlying fiscal forecast also indicates a similar need for action in 2028. Second, additional defence and investment spending could prove lower or higher than envisaged in the forecast. Based on past evidence, outflows of funds have tended to be slower, as actual spending has always undershot the target levels to a greater degree than anticipated in the forecast. However, lower regulatory and administrative barriers could lead to even faster outflows than assumed here. Given the ample funds available, this could push up price pressures materially. The main sectors affected would be the defence industry and civil engineering, as they may be subject to greater capacity bottlenecks. Accordingly, inflation pressures would probably hit investment particularly hard, but not necessarily consumer prices. In addition, further measures to counter the impact of high energy prices could be considered, depending on how the conflict in the Middle East evolves. Depending on what form they take, these measures could also have a direct bearing on consumer prices.

Successful structural reforms could support the recovery. The main driver behind the sharp rise in labour costs set out in the forecast is demographic change. This is because, as well as bolstering wages, it exerts high pressure on non-wage labour costs in particular. If, contrary to the assumptions in the forecast, the statutory health insurance measures failed to stabilise contributions on a large scale, this pressure could be even stronger than expected. However, if the Federal Government also reined in the increase in spending on pensions and long-term care as announced, this would generally have a favourable impact on non-wage labour costs and the competitiveness of the German economy. Moreover, the supply side of the German economy could be additionally reinforced if growth-enhancing reforms were implemented in the areas of taxes, the labour market and bureaucracy. In this case, GDP growth could be stronger than assumed in the forecast.

The Forecast for Germany is based on joint assumptions by the Eurosystem about the global economy, exchange rates, commodity prices and interest rates. These assumptions are based on information that was available as at 21 May 2026.

The war in the Middle East and the blockade in the Strait of Hormuz have pushed up energy commodity prices materially. The blockade of the world’s most important route for transporting fossil fuels and the war-related destruction of energy infrastructure in the region’s countries have sent crude oil prices climbing, at times, close to the highs seen during the 2022 energy crisis. Gas prices have also risen significantly, yet have remained well below the levels reached in 2022. The same holds for European electricity prices. 13 The forecast assumptions derived from forward prices suggest that crude oil and gas prices will decline rapidly and continue to fall sharply until the end of the forecast horizon. However, both exceed the levels of the December forecast by more than 50 % for this year, more than 30 % for 2027 and by a significant amount for 2028 as well. In terms of electricity prices, the difference is smaller and spans a shorter timeframe. Producer prices for food are also above the levels of the previous forecast, which is probably partly due to the higher fertiliser prices. 

High energy prices, uncertainty about global energy supply and US trade policy are taking their toll on the global economy. 14 Growth in the global economy remained solid overall in the first quarter of 2026, despite the significant rise in energy prices. In the winter half-year, it therefore trended largely in line with the assumptions of the December forecast. This was partly due to buoyant investment activity related to the AI boom, which benefited the US and some Asian economies in particular. However, reduced purchasing power owing to the sharp rise in energy prices and uncertainty about energy supply are expected to dent global demand. In addition, a more restrictive US trade policy is continuing to weigh on economic activity. 15 At 3.0 % this year and 3.2 % in 2027, global GDP growth will continue to lag behind the previous forecast overall. It will then reach 3.3 % in 2028, which is broadly in line with the December forecast. 

Compared with the assumptions in the December forecast, economic growth in the other euro area countries will be somewhat weaker initially, but slightly stronger in 2028. 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 11 June 2026. This year, economic growth in the euro area excluding Germany will also remain below the December forecast, at a rate of 0.9.∙%. Momentum will pick up over the next two years. The growth rate for 2027 will be at 1.4.∙%, consistent with the December forecast, while for 2028 it will be somewhat higher at 1.6.%. 

Global trade is showing resilience; German sales markets are expanding on a smaller scale. In the winter half-year of 2025/26, global trade was significantly more dynamic than expected in the December forecast. Imports by the United States and some East Asian countries, in particular, rose considerably due to the AI boom. Growth in global imports is set for a moderate slowdown in the short term. However, given the increased demand for high-tech goods due to the AI boom, global trade is expected to grow at a stronger pace than the global economy. After averaging 4.2 % this year, growth is projected to reach 3.6 % in 2027 and 3.5 % in 2028. As demand for imports from trading partners within the euro area is weak relative to global trade, growth in German exporters’ sales markets will continue to lag behind global trade.

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Defence expenditure will rise steeply. By 2028, its share in GDP will increase by around 1 percentage point compared with 2025, to 2½ %. 16  The broader NATO ratio will then be around 3¼ %. Military investment will rise particularly sharply. 

Non-military government investment will also increase markedly. By 2028, its share of GDP will rise by ½ percentage point compared with 2025. This is driven by the Infrastructure and Climate Neutrality Fund. However, borrowing by the Infrastructure and Climate Neutrality Fund will increase significantly more strongly during this period, and the funds will be used partly to ease the budget burden on central, state and local government. For example, local governments will receive extensive funds, but these funds will be used, in particular, to consolidate their budgets, which have large deficits. The local government investment ratio will remain broadly constant. 17    

Various measures 18 are aimed primarily at relieving firms and households of high energy costs. These include, in particular, the subsidisation of grid charges for electricity consumption from 2026 onwards and the reduced electricity tax for the manufacturing sector and agriculture. In addition, in response to the recent surge in fuel prices, energy taxes on petrol and diesel were cut temporarily in May and June. From 2027 onwards, electricity costs in energy-intensive industries (the industrial electricity price) will also be subsidised retroactively for the previous year.

Further changes in tax law and expenditure-side measures will increase the general government deficit. These include the temporarily more generous depreciation options for enterprises and the reduction in corporate tax rates in 2028. Besides this, the cut to VAT on food and beverage service activities to the reduced rate from 2026 onwards will also play a major role. By contrast, the gradual increase in tobacco tax in 2026 will generate additional revenue, on a small scale at first but rising somewhat over time. From this year onwards, central and state governments’ personnel expenditure will increase markedly as a result of them implementing the requirements of the Federal Constitutional Court for the appropriate support of civil servants. Expanded mothers’ pensions will take effect from 2027 onwards. The national accounts already record expenditure at the time it arises; actual disbursements are expected to take place only as of 2028.

Social security expenditure will rise considerably, and the overall contribution rate will increase by almost 2 percentage points to 44¼ % by 2028. Expenditure will grow significantly more strongly than wages subject to compulsory contributions. This is mainly because of demographic developments and benefit increases. It is therefore assumed that the contribution rates to the statutory pension insurance scheme and the long-term care insurance scheme will rise sharply. By contrast, the contribution rate to the health insurance scheme will remain stable from 2026 onwards because it is assumed that the announced health reform will achieve this objective. 19  The Forecast shows slower growth (than in the absence of a reform) in health expenditure and faster growth in contribution receipts due to broader assessment bases. 20 In addition, larger central government loans prevent contribution rates from rising more sharply. In particular, central government bridges cyclical funding gaps at the Federal Employment Agency.

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The deficit ratio will rise from 2.8 % in 2025, to 4.4 % and then 4.8 % in 2027 due to the expenditure ratio increasing significantly and the revenue ratio remaining broadly stable. Expenditure will rise sharply in structural terms. 21  This applies especially to defence expenditure, but also to non-military investment. In addition, there will be strong expenditure dynamics in the health, long-term care and pension insurance schemes. Interest expenditure will continue to grow – mainly as a result of the rising average interest rate on government debt, but also because of the mounting debt level. On the revenue side, the tax ratio will fall slightly due to various tax cuts. By contrast, the social security contributions ratio will rise because of increasing contribution rates to the long-term care and health insurance schemes.

In 2028, the deficit ratio will stabilise at around 4.9 %. In 2028, the revenue and expenditure ratios will grow roughly in tandem. The economic recovery will noticeably ease the burden on public finances. However, structural expenditure dynamics will remain strong. Defence expenditure, social spending, expenditure on infrastructure and interest rates will continue to rise significantly. At the same time, the structural revenue ratio will rise markedly. This is because the increase in contribution rates will be much more substantial than the tax cuts. The pension insurance scheme contribution rate, in particular, will rise sharply. Up to 2027, the pension insurance scheme will record large deficits and run down its reserves. These will be largely used up at the beginning of 2028, and the contribution rate will have to be raised sharply, from 18.6 % to 19.8 %. 

Of the different levels of government, central government (including its off-budget entities) will be the main driver of the sharply increasing deficits. This is mainly the result of rising net borrowing for defence expenditure. The debt brake will no longer limit this increase. In addition, the Infrastructure and Climate Neutrality Fund will increase its deficit, partly to finance transfers to state and local governments. Despite the expanded scope for borrowing, this Forecast foresees central government breaching the standard debt brake ceiling in the core budget by just under 1 % of GDP in 2028. The Federal Government reports a similarly large need for action in 2028 for the central government budget. By contrast, local governments will reduce their deficits, partly because this Forecast sees them using funds from the Infrastructure and Climate Neutrality Fund for this purpose. 22 Turning to the social security funds, the pension insurance scheme will build up large deficits up to 2027. In 2028, its reserves will then have been used up, and it will close its deficit with a sharp rise in the contribution rate.

The developments in the Forecast show a potential conflict with the EU rules (see Chart 1.17). The projected deficit ratio is well above the EU reference value of 3 %. Even when the escape clause for defence spending under the EU rules 23 is taken into account, the deficit ratio is still above 3 %. This is also evident from the Federal Government’s projections. By contrast, the European Commission recently projected lower deficits, and it expects Germany to comply with the 3 % limit if the escape clause is taken into account. It therefore does not currently recommend an excessive deficit procedure for Germany. 24  The EU rules also set targets for net government expenditure growth. According to the Bundesbank’s Forecast, these requirements will be met by 2027, but not in 2028. 25  As a general rule, whether the expenditure requirement has been breached is only assessed retrospectively based on the results.

The Maastricht debt ratio will rise from 63.5 % at the end of 2025 to 69.6 % at the end of 2028 because of high government deficits. This is mainly due to the deficits of central and local governments (particularly central government). The deficits in the social security funds do not increase government debt if they are financed from reserves. In 2026 and 2027, however, the social security funds will partially finance their deficits with central government loans. This will raise the Maastricht debt ratio by almost ½ percentage point by the end of the forecast period, as central government has to borrow funds for this purpose. This does not include the share of EU debt for which Germany is ultimately liable, especially in connection with NGEU. 26  This will amount to 2½ % of GDP at the end of 2028.

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Economic output is likely to grow only slightly over the summer half-year. 27 The impact of the war in Iran will considerably stall the economic recovery which would otherwise be on the cards thanks mainly to the strong fiscal stimulus in the second and third quarters. Gross domestic product in the second quarter is thus expected to stagnate. Households’ real disposable income is likely to decrease, and the significant decline in the GfK consumer climate index in the second quarter also points to a setback in private consumption. This will probably additionally be accompanied by a decrease in service providers’ activity. The key indicator of this is S&P Global’s corresponding Purchasing Managers’ Index, which fell well below the expansion threshold in April and May, as well as the gloomier ifo assessment of service providers’ situation. Following a weak start to the year due to weather conditions, the construction sector is set to normalise and thus see increased output. However, this increase is likely to be subdued, because losses in purchasing power alongside higher financing costs, increased construction prices and renewed supply chain disruptions are now weighing on housing construction in particular. At the same time, the state of heightened uncertainty is dampening business investment. That being said, industry has remained fairly strong recently, in line with comparatively robust export activity: incoming orders from abroad rose significantly again in March, and the ifo assessment of the manufacturing sector's situation also improved up until May. Short-term frontloading effects and sectoral competitiveness gains are also likely to have played a role here. 28 However, the significant deterioration in ifo export and business expectations of late suggests that industrial enterprises are expecting burdens due to the war in the Middle East, after a certain lag. Overall, industry and exports will probably continue to bolster GDP in the second quarter but go on to dampen it in the third quarter. At the same time, the largest direct burdens will already be starting to ease in the third quarter: it is assumed that energy commodity prices will decline, meaning that households will again have slightly increased disposable income in real terms. Furthermore, uncertainty effects will abate. Overall, economic output will then rise again slightly in the third quarter (by 0.1 % on the quarter).

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Exports will be curbed temporarily and will then see increasingly strong growth. Exports are unlikely to maintain their high momentum from the start of the year. The strong pace of expansion at that point in time was probably also supported by short-term bolstering effects in connection with the war in Iran. For example, monthly foreign trade statistics suggest that, in anticipation of potential supply bottlenecks and rising prices, demand for domestic intermediate goods increased. In addition, the greater dependence of Asian markets on raw materials from the Middle East is likely to have partly improved the competitive position of the German export industry. This development will probably continue into the second quarter – albeit to a significantly weaker extent. The business situation (as surveyed by the ifo Institute) of industrial enterprises with a key role in export business even improved somewhat further up to May, and the export expectations of these enterprises initially declined only marginally after the outbreak of the Iran war. Accordingly, exports are likely to increase slightly. The negative implications of the war are then expected to predominate in the third quarter, as indicated by the significant fall in export expectations from May. Strong increases in commodity prices, in particular, are likely to have a marked dampening effect on international trade and Germany’s export business. From the fourth quarter onwards, exports will probably return to a growth path. Foreign demand will then be more dynamic again and provide stronger growth impulses (see the section entitled “Assumptions regarding the international environment, exchange rates, commodity prices and interest rates”). Exports will go on to benefit somewhat more strongly from this in the coming year. Although their pace of expansion will thus see a gradual increase, it will remain subdued, lagging behind that of the sales markets. Against the backdrop of increasingly widespread use of AI, the latter will also be bolstered by high demand for microchips. However, this will is only likely to benefit German export industry to a limited extent. Furthermore, structural barriers to growth in the German economy will persist, weighing on the competitive position in international trade. 29 This will not change fundamentally over the forecast horizon. In particular, the sharp rise in non-wage labour costs is likely to place a marked additional strain on domestic firms’ price competitiveness. The measures adopted by the Bundestag to strengthen domestic production in Germany, such as, in particular, lowering corporation tax and improving depreciation options, are likely to boost competitiveness. However, other structural burdens, particularly those stemming from demographic change and increasing competition from China, will remain unaffected. These burdens prevent a fundamental improvement in competitiveness. Against this backdrop, the market share losses experienced by the German export industry will continue to increase over the forecast horizon.

The war in Iran is an additional burden on corporate investment, which is only slowly gathering momentum. The already unfavourable conditions for commercial investment have deteriorated further recently. In tandem with strongly underutilised industrial capacity, surging energy and commodity costs as well as high geopolitical uncertainty are likely to reinforce investment restraint. Accordingly, the majority of the capital goods producers surveyed by the ifo Institute assess their current business situation as poor. Their business expectations also suggest that investment restraint is likely to persist for the time being; having already been predominantly pessimistic for some time, they have recently declined considerably further. Business investment is therefore anticipated to decline markedly in the summer half-year and remain sluggish thereafter. It is only set to pick up over the course of next year. For one thing, the negative effects of the recently observed uncertainty shock will have subsided by then. For another, the degree of capacity utilisation in the manufacturing sector will increase in the wake of stronger export dynamics and boost investment propensity. However, business investment will not provide any noticeable growth stimulus until 2028. The rate of expansion will nonetheless remain subdued overall, as interest rates on loans to enterprises will rise gradually and the competitive environment for German industry will remain difficult. 

In the wake of the short-term burdens caused by higher energy prices, households’ consumption is expanding again and supporting economic growth. Since March 2026, the economic fallout from the Iran war has been weighing on households. Higher energy prices are resulting in marked losses in purchasing power and reducing real disposable income. Both are likely to decline slightly further in the second quarter, too. Private consumption is set to fall even more sharply. Although some households partially absorb income losses through consumption smoothing, Bundesbank survey results point to increased precautionary motives in view of the geopolitical uncertainty and the gloomy labour market situation. The saving ratio is thus likely to rise slightly overall (see supplementary information “Basing the Forecast for Germany on the gross rather than the net saving ratio”). The GfK sentiment indicators substantiate this picture of a temporary period of weakness. Consumer sentiment plummeted in March and April, recovering only slightly in May. However, as crude oil prices are assumed to not generate any further cost surges, private consumption is likely to pick up again somewhat in the third quarter and then shift to a more pronounced recovery path from next year onwards. Easing price pressures and the associated rise in real disposable income will boost momentum. In addition, uncertainty and precautionary motives stemming from the labour market situation will ease gradually, causing the saving ratio to fall markedly as from the middle of next year. However, in gross terms, the latter will remain elevated up to end of the forecast horizon as persistent and structural saving motives prevail (see supplementary information “Basing the Forecast for Germany on the gross rather than the net saving ratio”). Overall, private consumption will increase again somewhat more significantly in 2027 and 2028 and will become more important for GDP expansion.

The recovery in housing construction investment is expected to continue over the forecast horizon, but will be dampened in the short term by new stress factors. Housing construction investment rose more strongly in the fourth quarter of 2025 than assumed in the December Forecast for Germany. In principle, a recovery had been on the cards for some time, in line with rising demand indicators such as building permits. At the beginning of 2026, however, construction activity was significantly dampened by unfavourable weather conditions. Accordingly, housing investment declined markedly in the first quarter of 2026. As from the second quarter, the underlying impulses from higher demand should generally have a bolstering effect. In addition, the normalisation of construction activity following weather-related restrictions is likely to result in a short-term upward movement. However, this catch-up effect will be dampened by several factors. Households’ losses in purchasing power, higher mortgage interest rates and increased energy and construction costs as a result of the conflict in the Middle East are dampening demand and making it harder to finance new housing projects. In addition, there are potential supply bottlenecks that could further delay planned projects. According to the ifo Institute, both the assessment of the situation and expectations in the housing construction sector have deteriorated significantly since the start of the war. The latter merely stabilised at a low level in May. Overall, a countermovement that does not fully offset the first-quarter slump is assumed for the summer half-year. Over the remainder of the forecast horizon, the resurgence in households’ real disposable income and the persistently high demand for housing will bolster demand. At the same time, higher financing costs will continue to curb investment, with the result that growth in housing construction investment will show limited momentum. Nevertheless, they will make a marked contribution to the recovery of GDP in 2027 and 2028.

Real government demand will rise substantially up to 2028. Significantly increased defence expenditure will be the main driver of this development. Military investment in machinery and equipment will rise, in particular. Non-military investment, too, will increase considerably. This will mainly involve infrastructure and digitalisation projects, and will fall under the categories of investment in machinery and equipment and construction as well as other assets. Furthermore, government consumption will rise significantly. Social transfers in kind (particularly those provided by the health and long-term care insurance schemes) will continue to grow markedly. This is due to demographic developments and, initially, also to benefit increases. From 2027 onwards, however, assumed savings in connection with the health reform will dampen the increase somewhat (see the section entitled “Fiscal policy assumptions”). In addition, local governments will put the brakes on growth in current operating expenditure and personnel expenditure in order to reduce their high deficits.

The steep increase in the price of oil will reinforce the downward trend in the current account surplus that was expected due to relatively strong domestic demand. From the summer of 2026 onwards, real imports will consistently increase somewhat more strongly than real exports. This is a reflection of the comparatively strong domestic demand, to which expansionary fiscal policy will contribute. In particular, rising government investment in machinery and equipment is associated with increased imports, as an import share of just under 50 % is assumed here. This alone means that a further decline in the current account surplus is already on the cards – a development amplified still further by the terms-of-trade shock triggered by oil prices. This is because, even if it is assumed that oil prices will fall again, they will not return to their pre-crisis level, and the terms of trade will recover only partially by the end of the forecast horizon. As a result, the trade balance will deteriorate further, and the current account surplus (as a percentage of nominal GDP) will fall from 4.5 % in 2025 to 3.3 % in 2028.

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The better-than-expected economy in the winter half-year of 2025/26 did not support employment. Strong structural change continued to result in job cuts. In addition to low-paid part-time employment and temporary agency work, the latter now also includes employment subject to social security contributions on aggregate. Employment continued to decline in the industrial sector. At the same time, job growth subsided in some services sectors. It no longer offset the shedding of jobs in the manufacturing sector. Total employment was lower and unemployment higher than had been expected in the December 2025 Forecast for Germany for the past six months. 30 The hours worked by employed persons increased, however. 

The gloomier economy is also weighing on the short-term outlook for the labour market, and the expected recovery is moving further into the future. Short-term indicators of employment are currently at very low levels. Employment plans in the business community remain deep in contractionary territory, according to the ifo employment barometer. The IAB’s broader employment barometer, which also includes non-commercial services such as healthcare, long-term care, education and public administration, is at a relatively subdued level, too. The low number of vacancies newly reported to the Federal Employment Agency rounds out this picture. The transition rates from employment to unemployment are only slightly elevated. However, the transition rates from unemployment to employment are at a particularly low level. This means that while firms are not letting staff go on a large scale, they are also hiring very few new staff. This is because many firms have not yet fully adjusted their headcounts to the depressed order situation. Against this backdrop, employment is likely to decline a little more in the coming months and to stabilise only towards the end of the year. More intensive use of remaining staff will bolster productivity. Average working hours will also rise further. 

Unemployment is likely to go up only a little at first, before starting to decline. The IAB unemployment barometer is in slightly negative territory, but has gradually improved in recent months. The labour force has been shrinking since the beginning of the year. Because the labour supply is declining due to demographics, falling employment does not automatically mean rising unemployment.

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Negotiated wages are rising much more strongly in 2026 than in the previous year, at a rate of 2.9 %. This is mainly because base effects from inflation compensation bonuses 31 from 2024 had a wage-reducing effect last year. This kind of effect is no longer present this year. In turn, comparatively high wage agreements from the period of high inflation are still having an impact. However, new agreements are themselves likely to be more restrained. They have so far been somewhat below the expectations set out in the December forecast. The manufacturing sector, in particular, is expected to see low new agreements in 2026. This is demonstrated by the weak agreement in the chemicals industry, which envisages only a marginal wage increase of 1 % in annualised terms. In addition to the cyclical and structural burdens that industry had already been facing for some time, there were new burdens stemming from the war in the Middle East. As a result, wage agreements that are still pending over the remainder of the year are likely to contain only moderate wage increases. This will probably mainly affect the metal-working industry, whose collective wage agreement expires in October. Given the gloomy economic situation and weaker labour demand, industrial workers are currently willing to accept losses in real wages to keep their jobs. The situation is likely to be similar in consumer-related services sectors. By contrast, other services sectors could see adjustments in the pay scales and thus stronger negotiated wage growth, on account of the higher general minimum wage, for example. Overall, as things currently stand, no noteworthy second-round effects via negotiated wages are expected in the current year (for a definition of such effects, see supplementary information “Definitions of direct, indirect and second-round effects of an increase in energy commodity prices”). Many collective agreements run for long periods, and experience shows that strong price surges, if they are persistent, have a significantly delayed impact on negotiated wages. 

Negotiated wage growth is likely to be slightly weaker next year. Economic conditions are expected to improve in 2027. This is likely to result in higher new wage agreements again. On an annual average, however, aggregate wage growth will be somewhat weaker, at 2.7 %. This is because weaker agreements from 2025 and 2026 will still be having an impact. 

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The inflation rate rose to almost 3 % after war broke out in Iran. In May, too, inflation as measured by the Harmonised Index of Consumer Prices (HICP) was still 2.7 % according to the flash estimate, which was 0.5 percentage point above the rate expected in the December 2025 Forecast for Germany. This was mainly due to energy prices, which have risen significantly since March as a result of the war in the Middle East. Fuel and heating oil prices, in particular, rose more sharply than assumed in the December forecast. This was despite the temporary dampening of energy prices in May and June stemming from the time-limited lowering of energy tax on petrol and diesel (fuel rebate). By contrast, inflation in food prices was much weaker than expected. This was due to strong declines in the prices of dairy products in recent months. Prices for non-energy industrial goods and services developed broadly in line with the December forecast. This therefore also applies to the core rate, which stood at 2.6 % in May.

The HICP rate is expected to climb above 3 % in the coming months. The direct effects of higher energy commodity prices have probably already largely fed through to fuel and heating oil prices. After the temporary fuel rebate expires, energy inflation is likely to be higher again at first. Looking at gas, there is likely to be a lag before households feel the effects of higher wholesale prices. This is due to longer-term procurement and contract structures. Food price inflation will likely pick up as agricultural producer prices are expected to rise and energy costs will be higher. In the case of tobacco products, the planned increase in tobacco tax will probably push up prices towards the end of this year and the start of next year. However, inflation rates for dairy products will remain negative until the end of the year thanks to the steep price cuts at the start of the year. Overall, this will dampen the annual average rate for food in 2026. For non-energy industrial goods, indirect effects from the surge in energy prices are likely to gradually gain in importance. Higher production and transport costs will probably be passed on to households only after a lag. In March and April, however, there were already price increases at the upstream stages of production. Services inflation is likely to remain more or less constant at first. The waning growth in wage costs will have a dampening effect. By contrast, the rise in rents is likely to continue increasing. Higher energy prices are expected to play a major role only in selected services sectors. These include travel and transport services, whose prices are comparatively dependent on energy commodities. Overall, the inflation rate will rise to 2.9 % in 2026. By contrast, the core rate will fall slightly this year to 2.6 %. This reflects easing cost pressures from wages and subdued demand on the one hand and increasing indirect effects on the other.

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