"Experts see the end of the economic crisis", DW: German economy expected to recover in 2026

According to new economic forecasts by research institutes, the German economy is expected to emerge from the three-year crisis in 2026. The ifo institute has corrected its forecast for next year: according to this, gross domestic product (GDP) could grow by 1.5%, almost double the 0.8% originally projected.

Experts have also raised their forecasts for this year, from 0.2% to 0.3%. The Kiel Institute for the World Economy (IfW) also raised its forecast for next year to 1.6%. For the current year, economists raised their forecasts from 0.0% to 0.3%. "The key indicators confirm our assessment that, after two years of decline, the industry has reached the ceiling," explained Stefan Kooths, Director of Economics at IfW.

The principle of hope regarding Trump

"The crisis in the German economy reached its lowest level in the winter half of the year," said Timo Wollmershäuser, Ifo Economic Director. One of the reasons for the expected growth now is the growth package announced by the new German government.

Munich economists estimate that the economic impact of increased spending, tax cuts and investments will be 10 billion euros this year and 57 billion euros next year. However, the correction of the forecasts is mainly based on the thesis that the trade conflict with the EU caused by the US government should be resolved favorably.

"The growing optimism is probably also fueled by the hope that the new coalition will end the stagnation of economic policies and that an agreement will be reached on the trade dispute with the US," Wollmershäuser said. In the first quarter of 2025, economic performance has already increased by 0.4 percent, mainly due to projected exports to the US, but also due to higher consumption and private investment.

With the trade conflict between Europe and the U.S. still unresolved, economists continue to see risks in U.S. trade policy. According to ifo, customs tariffs increased by US President Donald Trump would reduce German economic growth by 0.1 percentage points this year and by 0.3 percentage points in 2026. If an agreement is reached on the trade dispute, the increase could be greater, while an escalation could lead to a new recession. In 2024 and 2023, Europe's largest economy contracted slightly.

Increased consumption and investment

According to IfW President Moritz Schularick, trade policy risks remain significant. "The erratic US tariff policy continues to increase uncertainty for the German foreign economy." In addition, German exporters are particularly affected by the significant loss of competitiveness. Therefore, the IfW predicts that exports will continue to fall this year by 0.4%. An increase of 1.2% is not expected until next year.

The IfW sees the reason for a positive development mainly in the domestic economy. "After two years of stagnation, private consumption is growing again and business investment is also gradually returning to positive territory," Kooths said. However, the dynamism of the private economy remains very moderate. The IfW is convinced that, while the new government coalition's increased room for manoeuvre in financial policy is increasingly felt over the next year, the pace of enlargement will accelerate significantly.

At the moment, Ifo does not expect inflation to rise: it is projected to reach 2.1 percent this year and 2.0 percent in 2026. According to these projections, the unemployment rate may fall slightly in 2026 as well. Ifo economists predict 6.3 percent this year and 6.1 percent next year. Since the beginning of the year, the business atmosphere has also improved: Ifo's business climate, which is determined by a survey of 9,000 managers, has improved over the past five consecutive months.

Other economists also see a recovery

Other economic institutes also updated their forecasts. According to the Leibniz Institute for Economic Research in Halle (IWH), the German economy is showing the first signs of recovery. "Signs of an economic recovery in Germany are multiplying," said Oliver Holtemöller, Vice President of IWH. Production increased by 0.4 percent in the first quarter. Private consumption also increased for the first time in a long time. One reason is the significant increase in demand from the United States.

According to the IWH, this is mainly due to importers who have brought their orders earlier due to the announcement of the tariff increase. According to the summer forecast, GDP is expected to grow by 0.4 percent this year. In March, the Institute still forecast a 0.1 percent increase. For 2026, IWH expects growth of 1.1 percent. A similar trend is expected in eastern Germany.

The RWI (Leibniz Institute for Economic Research) also forecasts GDP growth of 0.3 percent for this year. In the spring, Essen experts still expected a 0.1 percent decline in economic performance. For 2026, they now predict a growth of 1.5 percent. In the report presented in Berlin, the OECD predicts an increase of 0.4 percent. According to forecasts, this will reach 1.2 percent in 2026./DW