KfW Research predicts 1.5 per cent growth for Germany in 2026

• KfW’s economists maintain their forecast for the coming year
• Stimulus effect from the fiscal package drives positive outlook for domestic demand
• KfW Research revises its expectations for the euro area upwards

Germany’s gross domestic product (GDP) stagnated in the third quarter. So far, there are no signs of an upswing in Germany as leading indicators do not paint an unequivocally positive picture. However, KfW Research expects economic output to grow slightly in the final quarter of 2025. After two years of recession, KfW’s economists continue to predict moderate growth of 0.2% for the year 2025 as a whole. They maintain their forecast of +1.5 per cent for 2026.

“Although the US protectionism and the losses in competitiveness experienced in recent years are weighing on the growth outlook, the planned massive increase in public-sector expenditure offers good prospects for domestic demand,”

said Dr Dirk Schumacher, Chief Economist of KfW.

“We expect gross domestic product to expand at a rather leisurely pace at the beginning of the year 2026 before gathering steam in the second half of the year. The planned public-sector investment and defence expenditure should then get underway and lead to accelerated growth.”

Business investment, too, is likely to expand again significantly next year as capacity utilisation increases. The prospects of public-sector contracts for the defence industry and construction sector will play a major role here.

Apart from economic drivers such as the fiscal-policy impetus, growth will be driven by an unusually large number of working days next year. The calendar effect alone accounts for 0.3 percentage points of the GDP growth expected by KfW Research.

The inflation rate in Germany has increased again slightly since the summer, in part because prices in the services sector continue to exert upward pressure. That required KfW Research to moderately amend its inflation forecast for 2025 by 0.1 percentage points to 2.2 per cent. The forecast for the year 2026 remains at 2.0%. In the first quarter of 2026, inflation is likely to slip well below 2 per cent before picking up again.

For the euro area, KfW Research has slightly revised its growth forecast for 2025 upwards by 0.2 percentage points to 1.4 per cent. The economies of many countries have recently shown themselves to be robust, with France in particular achieving surprisingly solid growth of 0.5 per cent in the third quarter. KfW Research expects the euro area to grow by 1.3 per cent in 2026, up 0.2 percentage points on its previous forecast. Household consumption is likely to be the main driver as wage growth in the euro area remains positive in real terms.

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