The economy in Germany has recovered again after difficult years. The most prominent economic research institutes expect growth of 1.3 percent in 2026. The growth rate next year is expected to reach 1.1 percent. This is much higher than expected in the spring.
When asked about the reasons, economists first point to the global economy, which, according to them, appears to be very strong despite the war in the Persian Gulf. “This benefits, for example, the German export sector, but also behind it are factors including the global economic boom in the field of artificial intelligence,” Oliver Holtmüller, of the Leibniz Institute for Economic Research in Halle, said during the presentation of the current joint economic report in Berlin.
Germany benefits from chemical products and data center development
Demand has increased from outside Germany, for example, for chemical products derived from oil and natural gas, due to the inability of competitors to supply these products due to the closure of the Strait of Hormuz. German companies are also in demand in the development of artificial intelligence data centers; For example, in equipment goods for energy supply and services in the information and communications sector. The driver of this recovery is largely government spending on infrastructure and defense.
However, this recovery will not last for a long time, according to researchers. The relevant institutes expect growth of only 0.4 percent for the year 2028. Regarding this, Stefan Coates, from the Kiel Institute for the World Economy (IfW), said: “The forces of growth are weakening even more.” Growth in Germany is slowing as a result of high energy prices, a shortage of skilled workers, an increase in the proportion of elderly people in society, and weak investments for years in many German companies. Therefore, the institutes warn against misunderstanding the recent positive numbers as the beginning of a new economic recovery.
Debt-backed economic recovery
In this situation, the German government plays a decisive role. The coalition government consisting of the two conservative Christian Union parties (the Christian Democratic Party and the Bavarian Christian Social Party) as well as the Social Democratic Party decided to invest heavily in modernizing the infrastructure and arming the German army.
These additional expenses help in the short term to create demands for companies and secure job opportunities. At the same time, investments in roads, railways, digital networks and military equipment should boost Germany's competitiveness.
Although economic researchers undoubtedly acknowledge the impact of this growth-supporting spending. Especially at a time when consumers are conserving their money and many companies are postponing investments, the state acts as an important growth engine. But it is precisely at this point that economists' criticisms also begin, because government expenditures are financed by debt.
"Defective fiscal policy"
Expectations indicate that the government deficit will rise from 4.1 percent of economic output this year to 4.7 percent in 2028. At the same time, the interest burden on the state’s debt will increase. Therefore, in the future, larger amounts of the budget must be allocated to debt service.
The title of the joint report is “Economic Recovery with Structural Problems - Misguided Fiscal Policy.” Besides debt-based fiscal policy, the report cites an aging society and the rising price of energy as huge structural problems. “We have two huge building blocks: the first is demographic, related to the population, and the second is related to the security of energy supplies and prices,” says Oliver Holtmüller.
Within this context, economist Holtmüller strongly criticizes the lack of clarity of the “measures, reforms and framework conditions” that Germany wants to follow to abandon fossil fuels. He says that there has not been observed - even partially - any clear vision of how to implement the transition in the energy sector in accordance with the climate protection law.
Warning: The rise of the AfD scares away foreign skilled workers
The biggest challenge facing Germany remains the decline in the number of workforce. As the baby boom generation enters retirement, the German economy is losing millions of workers. Today, many sectors in Germany complain of a shortage of workers. Therefore, it is necessary to be open “to the migration of qualified workers,” as Holtmüller says.
Given the rise of the Alternative for Germany (AfD) party, which some of its wings are considered far-right, and its election victory, Holtmüller pointed to studies showing that “economic development in regions controlled by populist forces is proceeding weaker compared to other regions.” He stressed that the most important thing is openness.
If immigration to Germany stops, the population will continue to age. This leads to an increase in social insurance contributions, which in Germany are paid equally by workers and employers. Regarding pension reform, economists call for the abolition of early retirement without deductions after 45 years of work and the payment of monthly contributions. They say that the discussion about reversing this decision is wrong.
In this regard, economist Stefan Kötz commented, saying that “unclear economic policy contributed to the generally weak development in Germany,” and added with clear sarcasm: “If the reform packages announced now are announced every quarter and are dismantled and postponed again, it is possible that the impression will arise that the four main opponents of the reform policy are spring, summer, autumn and winter.”
Economists enjoy broad support from economics
While the state is mobilizing billions, the private sector suffers from a lack of activity in several areas. Stefan Koutz says that investors are afraid to invest "because they do not know what awaits them, and what the general conditions are here in Germany." “We simply need more confidence,” says economist Holtmüller. The federal government must take care of this, and then it can improve the public mood.
This result is fully and unreservedly supported by German companies, as the reactions to the economic report show. “What German companies need now are not new discussions, but economic policy decisions,” demanded Helena Melnikov, chief executive of the German Chamber of Commerce and Industry. She added, "This can only be achieved by following a firm reform path, which is reducing costs, reducing bureaucracy, accelerating procedures, and modernizing infrastructure."
The economy is in a turning point
For many decades Germany has been a country with strong industry. But the industry in Germany is constantly declining. Therefore, Germany loses about 15 thousand industrial jobs every month. The automobile, machinery and metal industries are particularly affected. In conjunction with this, over the past two years, Germany has witnessed the establishment of many companies working in the field of digitization and artificial intelligence.
Economic experts believe that these companies need support, especially financial support. The result: many companies move to the United States of America. "We're very good at things like development, patenting... and that sort of thing, but then what's interesting is that these ideas that we develop here lead to added value elsewhere," criticizes expert Timo Vollmersheuser from the Ifo Institute in Munich.
After asking what could improve Germany's growth prospects, the researchers pointed to a program of reforms presented in the spring. These reforms include proposals including ending social security contributions and enhancing work incentives for the elderly. Regarding the energy transition, economic institutes rely more on price indicators and call for avoiding unilateral national actions regarding climate protection.
Sharp criticism of lowering fuel prices
In this regard, experts directed sharp criticism at the decision to reduce fuel prices, which is scheduled to take effect on October 1. They described it as an absurd, comprehensive measure to ease the burden on prices for which there is no room for maneuver in fiscal policy.
The state cannot currently afford such costly measures, and “their results are also economically counterproductive.” Oliver Holtmüller says that fuel tax cuts “prevent a proportion of the reduction in demand, which is especially necessary when there is a shortage of energy supplies.”
Prepared by: Raed Al-Bash
