Germany is growing again, after three years that amounted to a prolonged flatline. The country's five leading economic research institutes now expect real GDP to expand by 1.3% in 2026, a meaningful upgrade from their earlier assessments and the first notable growth since the economy tipped into recession. But the recovery comes with an unmistakable asterisk: it is being pulled along by state spending and export demand, not by the private investment that would make it durable.
A recovery built on government borrowing
The joint forecast from the institutes in Kiel, Berlin, Halle, Essen and Munich makes the mechanics plain. The federal budget deficit is expected to widen from 3.2% of GDP last year to 4% this year and 4.5% by 2028. This is not an accident of weak tax receipts. It is the arithmetic of a country that has chosen to spend its way out of trouble. The Ifo Institute puts the fiscal impulse for 2026 at roughly €40 billion, or 0.8% of GDP, a figure that is projected to decline to about €18 billion, or 0.4% of GDP, by 2028.
The Kiel Institute for the World Economy, known for its more hawkish reading of fiscal sustainability, expects this expansion to grind to a halt before the decade is out. It weights the burden on households more heavily than Ifo does, pointing to rising social insurance contribution rates as a drag that will offset the stimulus. The disagreement between the institutes on this point is real, but the direction is not in dispute: Germany is borrowing more to grow more, and the borrowing will have to stop at some point.
Exports find their footing
The other engine is foreign demand. After three consecutive years of shrinking exports, the institutes now expect growth in overseas sales this year and, at a more moderate pace, next year. The drivers are twofold: stronger shipments to other EU member states and to the United States, plus demand for electronic components used in artificial intelligence systems. Timo Wollmershäuser of the Ifo Institute pointed to a robust global economy, with world production forecast to grow 3% this year and 3.2% next, according to the Kiel Institute's calculations.
This is a relief for Germany's manufacturing base, which has endured a punishing stretch. But the composition of the export recovery matters. AI-related electronics demand is a niche, albeit a lucrative one, and it sits awkwardly alongside a broader industrial sector that still faces high energy costs, competitive pressure from China and structural shifts in automotive technology. The institutes are not projecting an export boom. They are projecting a return to modest growth, built in part on a product category that did not exist at scale five years ago.
The 2028 ceiling
Perhaps the most striking element of the forecast is what happens after 2026. Real GDP growth is projected to slow to 0.7% by 2028. The institutes describe this as Germany reaching its "Wachstumsgrenzen", its growth limits. The phrase is doing a lot of work. It signals that the current expansion, such as it is, does not solve the underlying problem: an economy whose potential growth rate has drifted downward because of demographics, underinvestment in productive capacity, and regulatory drag.
The unemployment rate, currently around 6.4%, illustrates the bind. It is not expected to fall below 6% until 2028, and the institutes link this explicitly to a declining working-age population. Germany is running out of workers, and the ones it has are becoming more expensive. This is not a cyclical problem that a couple of good quarters will fix.
Interest costs heading for €100 billion
The fiscal trajectory carries its own structural weight. Wollmershäfer told journalists that the German state currently spends roughly €50 billion a year on interest payments. By the end of the decade, that figure is forecast to double to €100 billion. Those are sums that have to be financed from somewhere within the federal budget, and every euro spent on debt service is a euro not spent on infrastructure, education or research.
This matters because the current recovery leans heavily on government demand. The institutes note that the strong increase in equipment investment over the next two years will be predominantly driven by military spending. Defence procurement is a legitimate category of public investment, but it does not raise the economy's productive capacity in the way that transport infrastructure or broadband networks might. The Ifo Institute was blunt about the underlying condition: business conditions for private investment remain poor, and without private capital the upswing lacks legs.
Inflation stuck above target
Price pressures are another unwelcome companion to the recovery. The institutes expect inflation to remain at 2.7% through 2027, falling to around 2% only after that. For the European Central Bank, which targets 2% over the medium term, this means German price growth will continue to run above the institution's benchmark for at least another year. It also means that any further interest rate cuts from the ECB will need to contend with persistent inflation in the eurozone's largest economy, even as other member states may be more compliant with the target.
The ECB's governing council has already navigated a difficult path between Germany's inflationary tendencies and the weaker conditions in southern Europe. A German forecast that keeps price growth at 2.7% for the foreseeable future does not make that balancing act any easier. The institutes' projection implicitly assumes that the central bank will not tighten further, but it also suggests that the window for aggressive easing has closed.
Eastern Germany grows more slowly
The Halle Institute's breakdown shows eastern Germany, including Berlin, growing at 1.1% this year against 1.4% for the country as a whole. The gap is modest, and the institutes caution against reading a clear trend into it: last year, eastern Germany grew at 0.4%, twice the national rate of 0.2%. Regional differentials in Germany tend to fluctuate from year to year without revealing much about structural convergence or divergence. The more important regional story is the one the forecast does not tell: whether the heavy state spending that is driving the national recovery is reaching the places where productive capacity is most needed.
What the upswing lacks
Wollmershäfer's assessment, delivered at the Munich press conference, was succinct: "Was dem Aufschwung fehlen, sind private Investitionen." What the upswing lacks are private investments. The institutes agree that state demand is providing a clear boost this year and that debt-financed spending is becoming more productive. They disagree on how long that can continue. The Ifo Institute sees the fiscal impulse tapering but persisting through 2028. The Kiel researchers expect it to peter out entirely. Both positions converge on the same destination: without private capital, Germany's growth will settle back to a rate that barely clears stagnation.
The Federal Statistical Office will publish the first hard data for the third quarter in November. Until then, the institutes' forecast is the most detailed guide to where Europe's largest economy is heading. The direction is upward. The pace is modest. And the fuel is borrowed.
People mentioned
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Timo Wollmershäuser
Organisations
Ifo Institute · Kiel Institute for the World Economy · Institute for Economic Research Halle · RWI Essen · German Institute for Economic Research
