The German economy is forecast to grow by 1.3% this year, doubling a previous estimate by leading economic institutes and providing some rare good news for the country’s beleaguered chancellor, Friedrich Merz.
Oliver Holtemöller, head of economic research at the Halle Institute for Economic Research (IWH), said on Thursday: “The economy has developed more robustly than expected. However, the recovery rests on a narrow foundation, as high energy prices and structural problems continue to weigh on economic activity.”
Holtemöller added that the German economy has been recovering since the end of 2025 but that the recovery, although stronger than expected in spring, remains modest. In their spring report, economic researchers had previously forecast growth of 0.6%.
The consequences of the war in Iran and the sharp rise in energy prices had initially put a significant damper on the economy. In their spring forecast, experts had warned of an “energy price shock.” However this turned out to be less severe than initially feared.
The recovery is being supported by a pickup in exports and the expansionary fiscal policy of the government, with debt-financed funds for infrastructure and defence. A sustained boom in artificial intelligence (AI) has provided additional momentum, the institutes said.
Merz promised an economic turnaround when he became chancellor in May last year, but has struggled to show that a recovery is taking hold in Europe’s largest economy.
Last week, Merz pointed to signs of Germany’s economic recovery and said that the country was on the way out of a period of “economic decline or stagnation,” while stressing that further reforms are needed.
The institutes expect the German economy to gain more momentum than expected next year as well. Private consumption and housing construction is likely to pick up. They therefore forecast GDP growth of 1.1% for 2027. Previously, they had anticipated growth of 0.9%.
But they also cautioned that Germany’s underlying problems remain. Companies face capacity constraints and the economy is expected to remain sluggish in the longer term. They forecast growth of just 0.4% in 2028.
