The prospects for the development of the German economy are brightening: the leading institutes expect significant growth in gross domestic product. But success only rests on a “thin foundation”.
From the perspective of leading research institutes, the German economy is improving significantly. In the current year, the institutes expect an increase in gross domestic product (GDP) of 1.3 percent. In their spring report, the institutes had expected an increase of 0.6 percent. “However, the upswing stands on a thin foundation because high energy prices and structural problems are a burden,” warned Oliver Holtemöller, head of economic development at the Leibniz Institute for Economic Research Halle (IWH).
The consequences of the Iran war and the sharp rise in energy prices initially significantly dampened the economy. In their spring forecast, the economic institutes warned of an “energy price shock”. However, as a result of the Iran war, this was lower than initially feared.
The recovery will also be supported by a revival in exports and the federal government's expansive financial policy with debt-financed funds for infrastructure and defense. An ongoing boom around artificial intelligence (AI) could therefore bring additional impetus.
Economists expect economic dynamics
The institutes expect the German economy to continue to gain some momentum in the coming year. Private consumption is likely to increase, as is housing construction. They therefore expect GDP growth of 1.1 percent for 2027. They had previously expected an increase of 0.9 percent.
However, the upswing should not hide the fact that the structural problems of the German economy continue. Companies' capacities could increasingly reach their limits. According to institute estimates, the German economy will remain underperforming in the coming years. The experts predict growth of 0.4 percent for 2028.
The so-called joint diagnosis is prepared by the German Institute for Economic Research, the Ifo Institute, the Kiel Institute for the World Economy, the Leibniz Institute for Economic Research Halle and the RWI, the Leibniz Institute for Economic Research Essen.
Merz is counting on economic recovery
Other economic experts had also recently revised their expectations upwards. The Organization for Economic Cooperation and Development (OECD) expects growth of 1.1 percent in Germany this year. Their current forecast is 0.4 percentage points higher than the June estimate. The OECD also expects an increase of 1.1 percent for 2027. However, due to the conflict in the Middle East, the outlook is subject to considerable uncertainty.
The Federation of German Industries (BDI) expects growth of one percent this year. He had previously expected 0.6 percent. Tailwind comes primarily from business with European partners as well as from government spending on infrastructure and defense. Private investment, however, remained weak. The BDI therefore called on the federal government to implement the announced reforms.
Chancellor Friedrich Merz also sees signs of economic recovery. “We are out of this valley of a shrinking or stagnating economy,” said Merz last week. At the same time, he emphasized that reforms were necessary.
