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Germany’s economy is set to strengthen markedly from mid-2026 after a prolonged period of stagnation, according to new forecasts from the Bundesbank. Higher public spending and a revival in exports are expected to drive the recovery following two consecutive years of contraction.
Emerging from a prolonged slump
Europe’s largest economy has struggled to regain momentum after GDP declined in each of the past two years. Germany narrowly avoided a recession in 2025, recording stagnation in the third quarter after shrinking earlier in the year. The Bundesbank now expects only marginal growth at the end of 2025 and a similarly weak start to 2026.
Growth outlook improves from mid-2026
In its latest projections, the Bundesbank sees GDP expanding by 0.6% in 2026, accelerating to 1.3% in 2027 and easing slightly to 1.1% in 2028. Bundesbank President Joachim Nagel said economic growth is expected to strengthen markedly starting in the second quarter of 2026.
Fiscal spending and exports lead recovery
The rebound is expected to be driven primarily by higher government spending on defense and infrastructure, alongside a resurgence in exports. These factors are set to offset some of Germany’s long-standing structural challenges, including labor shortages and heavy regulation.
Downside risks remain for growth
Despite the more optimistic outlook, the Bundesbank warned that risks to growth remain tilted to the downside. Germany remains exposed to higher US trade tariffs and intensifying competition from China, both of which could weigh on industrial output and export performance.
Inflation pressures persist
On inflation, the central bank expects price growth to moderate more slowly than previously anticipated. Continued strong wage growth and smaller declines in energy prices are likely to keep inflation elevated, with risks to the outlook seen on the upside.
Market reaction
The revised forecasts pushed German bond yields higher, with the 10-year yield rising to 2.88% and the 30-year yield reaching 3.53%, its highest level since 2011, reflecting expectations of stronger fiscal stimulus and higher issuance.
As International Investment experts report, the Bundesbank’s outlook points to a cyclical recovery rather than a structural turnaround. Germany’s growth prospects will increasingly hinge on public investment and external demand, while inflation and competitiveness challenges are set to remain key constraints.