Despite ongoing crises with global impacts such as the Iran War, the federal government is significantly increasing its growth expectations for the current year. It now assumes economic growth of 1.3 percent in the current year. In April it scaled back its expectations and expected an increase of 0.5 percent.
Why the situation is better than expected
The consequences of the Iran war and the sharp rise in energy prices initially had a significant impact on the economy. However, the German economy has proven to be more resilient than expected, the Ministry of Economic Affairs said. Exports as well as government investments and higher defense spending are cited as the main reasons for the growth.
German foreign trade was even able to benefit from global bottlenecks at times: in view of the conflict in the Gulf region, buyers increased their inventories of energy-intensive goods that were produced in Germany. Economics Minister Katherina Reiche (CDU) named steel, fertilizer and aluminum as examples. German suppliers are also benefiting from the boom in artificial intelligence.
Better numbers also expected for 2027
The German economy is likely to continue to grow in the coming year. The federal government expects an increase of 1.1 percent for 2027. Previously, it had assumed growth of 0.9 percent. However, further developments depend largely on the course of the geopolitical conflicts in the Middle East and Ukraine. The federal government is forecasting growth of just 0.6 percent for 2028.
At the end of September, leading economic research institutes had already raised their growth forecast for Germany to 1.3 percent. In the spring, the institutes warned of an “energy price shock”. However, the effects of the Iran war remained less than initially feared. The upswing still rests on a narrow foundation, it was said.
Reiche also called for reforms to secure growth. “Without self-sustaining growth we won’t make it back to the top, and without growth the distribution struggles will become stronger.” An efficient welfare state can only be maintained with good economic growth. She cited reductions in bureaucracy, faster start-ups, social reforms and lower energy prices.
Declining immigration: there is a shortage of skilled workers
The labor market remains a problem. Employment is likely to decline in the coming years. “So far, additional foreign employees have offset the decline in German employees. That is no longer the case at the moment,” said Reiche.
At the same time, the existing workforce potential must be better exploited. “In addition to capital, growth requires talent and manpower,” said the minister. With regard to working hours, she pointed out that an average of around 1,370 hours are worked per year in Germany, but more in Spain, Greece and the USA. “We have to talk about how we can increase overall work performance,” said Reiche.
Foreign skilled workers go there “where they see positive economic dynamics,” said Reiche. Social openness also plays a role. Resentment and rejection could deter high performers. This is a danger for Germany as a business location, said the minister. A strong political center and a strong economy are “definitely the best ticket for investment and trade,” said Reiche.
Recovery not consolidated
Despite the more optimistic forecasts from the federal government and economic research institutes, the Association of Family Businesses warns against excessive confidence. “A small hole in the clouds must not blind us to the fact that our overall weather situation is still heading towards the perfect storm,” said the association’s president, Marie-Christine Ostermann.
Although exports are cited as the reason for the increased forecast, there were already signs of a slowdown in August. According to preliminary figures from the Federal Statistical Office, the value of exports fell by 0.8 percent to 137.6 billion euros after calendar and season adjustments.
Chamber of Commerce warns against excessive optimism
«The development of exports remains without any momentum of its own. Trade policy uncertainties and structural locational disadvantages are slowing down the export industry again," complained the head of foreign trade at the German Chamber of Commerce and Industry (DIHK), Volker Treier. The current decline shows that the export recovery was “just a mild breeze”.
DIHK general manager Helena Melnikov warned: “This upswing has come at a high price.” It is based primarily on increasing exports to the EU internal market and on debt-financed government spending. “Without substantial economic policy reforms, this upswing will only have a short shelf life.” Lower costs, less bureaucracy, faster procedures and more modern infrastructure are needed.
