Buying mood in the basement, gloomy labor market prospects and still hope for the German economy: The Bundesbank expects that after three lean years things will gradually improve in 2026.
The German Institute for Economic Research (DIW) also predicts: Europe’s largest economy is in the starting blocks. However, many economists only expect a noticeable upswing from 2027, when the government’s billions for roads, rail and defense will have their full effect.
After three years of economic downturn, the Bundesbank is predicting growth of 0.6 percent for 2026. The forecast is somewhat more pessimistic than in June: six months ago, the Bundesbank had predicted a calendar-adjusted 0.7 percent increase in real gross domestic product (GDP) for next year.
Some other economic forecasts have also recently been scaled down. If you take into account the additional working days in the next two years, as more public holidays fall on the weekend, the Bundesbank forecast is somewhat more optimistic. On this basis, the DIW expects growth of 1.3 percent for 2026 and 1.6 percent for 2027.
Gradual recovery
“The German economy will make progress again in 2026: initially still cautiously, but then things will slowly start to improve,” predicts Bundesbank President Joachim Nagel. The current year is expected to end with a mini-growth of 0.2 percent.
For the first quarter of 2026, the Bundesbank expects an increase of 0.1 percent compared to the previous quarter, as in the final quarter of 2025. “From the second quarter of 2026, economic growth will increase noticeably, driven primarily by government spending and rising exports,” says Nagel.
But higher US tariff barriers and the dispute over important raw materials with China remain a burden for Germany as an export nation. The DIW does not yet see any sustainable recovery in the private sector: “Although some calm has returned after the turbulence caused by the customs conflict, exports will probably continue to develop weakly in view of the persistently subdued foreign demand – especially from third countries.”
Billions from the state as an economic driver
The upswing is likely to gain significant momentum in 2027: The Bundesbank then expects economic growth of 1.3 percent after price and calendar adjustments, which is 0.1 percentage points more than estimated in June. According to the forecast, Europe’s largest economy should grow by 1.1 percent in 2028.
Government spending of billions on infrastructure such as roads and railways as well as investments in defense are likely to provide increasing impetus. However, the federal government’s 500 billion euro debt package is not a panacea, as a survey by the Munich Ifo Institute once again shows: According to the monthly survey of several thousand companies, almost all industrial sectors are planning to continue job cuts in the coming months. “The weak economy is further slowing down the labor market,” says Ifo survey director Klaus Wohlrabe.
Is consumption picking up?
Many people are worried about their income and want to save more, as the Nuremberg research institutes GfK and NIM have discovered. The result: The buying mood in Germany at the end of the year was worse than it had been in months.
But the Bundesbank sees upward potential in private consumption, which is an important pillar of the domestic economy: “Strongly rising wages and a gradually improving labor market support real incomes and thus private consumption.”
Inflation rate remains stubbornly above the two percent mark
However, high prices for everyday life remain a burden for consumers. “The decline in the inflation rate in Germany is a little slower than expected,” says Bundesbank President Nagel. Because of wage growth and less falling energy prices, the rate will fall more slowly than expected.
After 2.3 percent inflation in the current year, the Bundesbank expects a rate of 2.2 percent in 2026, calculated using the European method (HICP). In 2027 (2.1 percent) and 2028 (1.9 percent), the medium-term goal of the European Central Bank (ECB), which sees price stability in the euro area at 2.0 percent, will be achieved. The higher the inflation rate, the lower people’s purchasing power is because they can then afford one euro less.