KfW Research expects a significant growth spurt in 2026

• Gross domestic product in Germany to grow by 1.0 per cent in real terms next year
• KfW Research expects stagnation for 2025
• Inflation forecast downgraded

KfW Research has raised its forecast for price-adjusted gross domestic product (GDP) in Germany for 2026 by 0.7 percentage points to 1.0 per cent.

“After a long barren spell, the adjustment to the debt brake and the investment plans of the Federal Government provide the prospect of a growth spurt next year,”

said Dr Dirk Schumacher, Chief Economist of KfW.

KfW Research now expects gross domestic product to stagnate this year, after posting surprisingly strong growth of 0.4 per cent in the first quarter. KfW Research had previously forecast a minor contraction of 0.2 percentage points for 2025.

After positive first-quarter GDP growth, the variables have thus alternated between positive and negative in a sawtooth-shaped pattern for the 13th consecutive quarter. KfW Research predicts that this trend will continue and the growth rate in the current spring quarter will be moderately negative again.

“In the short term, the outlook for a sustained cyclical trend reversal is dim,”

added Schumacher. The pull forward in imports in response to the threat of tariffs was likely to have been partly responsible for strong quarterly growth at the beginning of 2025.

The sharp increase in US tariffs since April will be weighing on businesses. In its forecast, KfW Research expects the US to stand by its new base tariff of 10 per cent. KfW Research sees the US president’s most recent threat of a 50 per cent blanket tariff on all imports from the EU mainly as a negotiating tactic, although the risk of higher US tariffs and, hence, weaker economic performance in Germany continues to grow as a result. Given these trade policy headwinds, exports in particular are likely to contract again this year. Furthermore, the reduction in potential sales and profits caused by US protectionism and the increased uncertainty will put the brakes on investment activity.

The initiated easing of ECB monetary policy and the noticeable increases in real wages in 2024 are providing some growth impetus. Nonetheless, households are likely to increase their spending only moderately as real wages growth is slowing again significantly and the labour market is faltering.

For the euro area, KfW Research predicts 0.8 per cent growth for the current year and an increase to 1.0 per cent in 2026. Growth is likely to end up being relatively low particularly in France and Italy, while Spain’s strong economic performance will likely soften only slowly.

The stubborn services inflation contrasts with falling energy prices in Germany and disinflationary impetus coming from US tariff policy. KfW Research has therefore downgraded its inflation forecast for Germany by 0.3 percentage points to 2.1 per cent for this year and by 0.2 percentage points to 2.0 per cent for the coming year. Euro area inflation is likely to sit at 2.0 per cent and 1.9 per cent (previous forecast: +2.2 per cent and +2.0 per cent).

The current KfW Business Cycle Compass is available at: KfW Business Cycle Compass | KfW