Germany slightly raised its growth forecast for this year to 0.2% on Wednesday, helped by a planned government spending spree, but ongoing trade tensions will continue to weigh on exports, the country's main engine for growth.
The new government, headed by Chancellor Friedrich Mertz, in March approved a 500-billion-euro ($581.60 billion) spending plan to boost growth in Europe's largest economy, which has struggled to recover from shocks such as COVID-19 and Russia's 2022 invasion of Ukraine.
While the extra spending on infrastructure and defence is expected to boost the economy in the longer term, in the short term it will face headwinds from U.S. President Donald Trump's trade war.
The Economy Ministry said in a presentation on Wednesday that it now expects 1.3% growth next year and 1.4% growth in 2027. It previously expected growth of 1.0% for next year and zero for 2025, as previously published by Reuters.
"To secure long-term growth, we must clear the backlog of reforms: lower energy costs, promote private investment, address high taxes in international comparison, cut red tape, open markets, and enable innovation," German Economy Minister Katherina Reiche said at the presentation.
EXPORT-ORIENTED ECONOMY UNDER PRESSURE
Contrary to the typical recovery pattern, foreign trade is not expected to drive the upturn. Instead, it will be domestic demand, in particular private and public consumption and investment activity, the ministry said.
"While our public investment is contributing positively to growth, Germany's export‑oriented industry in particular remains under heavy pressure," German Finance Minister Lars Klingbeil said on Wednesday.
U.S. tariffs, Chinese overcapacity in many industrial sectors and the difficult international environment continue to take their toll on the German economy, Klingbeil said.
Exports are expected to decline by 0.1% in 2025, before posting growth of 1.2% and 1.6% in the two following years.
The number of unemployed people in Germany topped 3 million for the first time in a decade in August and according to the new government projections, unemployment will edge down from 6.3% this year to 6.2% in 2026, before easing to 6.0% in 2027.
DOMESTIC CONSUMPTION EXPECTED TO SUPPORT GROWTH
Stable prices, significant wage increases and targeted cost relief for private households will strengthen real disposable income in coming years, the economy ministry said.
In this environment, household consumption will rise by 0.9% this year, 0.8% in 2026 and 1.1% in 2027 in real terms.
Inflation is expected to remain slightly above the European Central Bank's 2% target, falling to 2.1% this year and 2.0% in 2026, before rising to 2.2% in 2027.
($1 = 0.8590 euros)
($1 = 0.8597 euros)
