KfW Research maintains forecast of 1.5 per cent growth for Germany this year

• KfW economists see first signs of positive effects from the Federal Government’s fiscal package
• KfW Research expects gross domestic product in Germany to grow 1.8 per cent in 2027
• Inflation is likely to slow moderately

Germany’s gross domestic product (GDP) grew slightly in the final quarter of 2025 after stagnating in the preceding quarter. KfW Research sees the development as a good starting point for this year. KfW’s Economics Department therefore remains optimistic about Germany’s growth outlook and forecasts GDP growth of 1.5 per cent for 2026. KfW Research expects GDP growth of 1.8 per cent in 2027 but predicts slowing growth momentum after that.

It regards the fiscal package of the Federal Government as a significant driver of growth, which is already evident in higher defence spending and should increasingly become visible in rising infrastructure expenditure. In this way, government consumption and investment will make tangible contributions to GDP growth. This economic spark should increasingly jump over to private business investment as well. KfW Research expects the fiscal impetus to have the strongest effects at the end of 2026. Household consumption should also contribute to growth driven by further real wage increases. This forecast is based on the assumption that no significant additional trade barriers are created and foreign trade does not further weigh on growth.

“We believe that the German economy is currently on a solid foundation on which growth is possible. We already see the strong rebound in new industrial orders as the first sign of an economic recovery. This will gradually generate follow-on orders for further economic sectors. We therefore consider an increase of 1.5 per cent in gross domestic product this year to be realistic,”

said Dr Dirk Schumacher, Chief Economist of KfW.

For the euro area, KfW Research has moderately raised its growth forecast for 2026 by 0.1 percentage points to 1.4 per cent. The euro area economy this year will be driven mostly by growth in investment and household consumption, and the fiscal impetus originating in Germany will likely be an important pillar of the positive development. KfW Research predicts 1.4 per cent growth in the euro area for 2027 as well.

Its economists expect inflation to remain largely steady over the next two years, with only minor deviations from the European Central Bank’s inflation target. Monetary policymakers are therefore under no pressure to act, so that KfW Research expects the key interest rate to remain steady at two per cent for the time being. Inflation should sit at 2.1 per cent in Germany and 1.8 per cent in the euro area in 2026 and 2027.

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