Economics Update May 2026 - German Economy: Outlook Remains Bleak

The positive economic data from the first few weeks of the year translated into 0.3 percent growth for the German economy in the first quarter of 2026. While this is not yet the long-awaited recovery, if this momentum were to continue, it would still be enough to achieve more than one percent economic growth for 2026 as a whole.

Nevertheless, the outlook remains very subdued: Based on consensus forecasts, only one of the 32 participating institutions expects the German economy to grow by more than one percent in 2026. In fact, economic output in the first quarter of 2026 was only 0.8 percent higher than at the end of 2019, immediately before the COVID-19 shock. By comparison: six years after the start of the recession in 2008, the figure was four percent; six years after the dot-com bubble burst, it was seven percent; and in the 1990s, it was as high as eight percent.

Germany also fares poorly in international comparison: The meager 0.8 percent growth in German gross domestic product (GDP) since the end of 2019 contrasts with a corresponding increase of 15 percent in the U.S. and seven percent across the entire eurozone. Both historically and in comparison to other economies, the German economy therefore theoretically has enormous potential to catch up. However, hardly anyone believes that this potential will actually be realized to any significant degree.

Why is that? In fact, the remaining hopes for positive growth in the German economy rest on the special debt measures initiated by the government taking effect: The recent rise in industrial orders, for example, is attributable to increased defense spending. In the construction sector, however, expectations for the future have recently slipped back deep into negative territory. The same applies to all major service sectors, where sentiment was subdued at best even before the war in Iran began. Energy prices, which have risen significantly as a result of the war, are weighing on private consumption; the generally high level of geopolitical uncertainty is dampening investment activity; and the external economic environment also remains unfavorable for the still export-oriented German economy for the time being. No one seriously believes that a broad-based economic recovery can be brought about solely through higher government spending. 

The framework conditions for private investment must be improved

Nevertheless, it would be too simplistic to attribute the sluggish performance of the German economy solely to exogenous factors. The core problem remains the weakness of private investment: While government spending at the end of 2025 was a good 13 percent higher than at the end of 2019, private investment was more than 11 percent below the level seen at that time. These figures should also be given greater consideration in debates on distribution policy, as a simple thought experiment shows: If the German economy had grown in recent years at the same rate as that of the other eurozone countries, Germany’s GDP would be more than 80 billion euros higher in real terms than it actually is. The finance minister could thus generate additional revenue of nearly 10 billion euros in a single quarter—which would have settled a large part of the debates surrounding the federal budget.

The bottom line remains: For sustainable positive development, the framework conditions for private entrepreneurship and private investment must improve significantly. The necessary steps have been described in detail on numerous occasions, and solutions have been identified. What has only begun to emerge so far is the political will to take concrete, growth-oriented action. Only when that changes will growth forecasts of two to three percent per year—as were regularly seen in the past following periods of weakness—be realistic.