Can Germany escape its economic slump in 2026?

Any return to economic growth in Germany in 2026 is expected to be slower and weaker than previously anticipated, according to several economic forecasts.

Europe's erstwhile powerhouse is in the midst of a prolonged economic slump. It has been in recession since late 2022, with only modest growth of around 0.1% expected for 2025.

While many economists believe it will return to stronger growth in 2026, hopes of a quick recovery are fading amid doubts over Berlin's planned investment spree under Chancellor Friedrich Merz.

Before Christmas, Germany's Bundesbank lowered its growth forecast for 2026 to 0.6%, down from its previous June forecast of 0.7%. However, the central bank raised the forecast for 2027 to 1.3%, predicting that the pace of economic activity would pick up from the second quarter of 2026.

Bundesbank's modest growth figure prediction chimes with other analyses. Germany's ifo Institute recently downgraded its growth forecast for 2026 to 0.8%.

"The German economy is adapting only slowly and at great expense to the structural shift through innovation and new business models," Timo Wollmershäuser, ifo's head of forecasts, said.

Germany's economy has been hit on several fronts in recent years. The Russian invasion of Ukraine exposed an overreliance on Russian gas, and pivoting away has been expensive and challenging.

Meanwhile Germany's export-driven model has been compromised by US tariffs and a shift in geopolitical relations with China, which for years was Germany's key market. Beijing is also now competing — and beating — Germany in several sectors it once was a willing market for, notably carmaking.

That feeds into Germany's wider struggle with deindustrialization and underinvestment. Exacerbated by rigid spending and borrowing rules, Germany's decades-long failure to invest has led to a range of difficulties, from crumbling infrastructure to weak digitalization.

Merz's CDU party came to power following February's election in part due to its pledge to embark on a major borrowing and investment drive. Merz changed the laws on government borrowing to push through plans to invest up to €1 trillion in defense and infrastructure over the coming decade.

However, doubts persist in Germany and beyond over how effective the spending will be.

Back in November, the five-member German Council of Economic Experts — which provides independent advice to the government — issued a grim assessment of the country's growth prospects and issued a warning over the spending plans.

It said the government was at risk of "squandering" the investment as it was using too much of the new funds to pay for pensions and social spending, echoing criticism made by the Bundesbank and various economic thinktanks in the country.

Unless the government changed course, "growth opportunities could be lost, and the long-term debt sustainability of the German state could be jeopardized," the report stated.

Many economic forecasts for 2026 hinge on the potential success of the €1 trillion Merz plan.

Bundesbank president Joachim Nagel says he expects growth to pick up from the second quarter of 2026, "driven mainly by government spending and a resurgence in exports." He said that once the fiscal push kicks in from the second half of 2026, "additional defence and infrastructure expenditure will then push up government demand sharply."

In its forecast, Deutsche Bank says there are doubts over the speed of implementation of the spending spree and whether or not it will have a lasting effect on GDP growth. "While the fiscal expansion is likely to lead to a 'sugar rush,' its impact on potential growth might be limited," it said in a note. "This is because large parts of the extra debt will be used for higher social spending and subsidies."

It's not only Germany that is banking on a boost from the planned fiscal expansion. A recent survey of 88 economists by the UK's Financial Times newspaper found that many believe Europe's wider hopes of economic recovery hinge on the German plan.

Recent business sentiment surveys have not pointed to much optimism, with many companies still pessimistic about the first half of 2026. However, there is a sense that things will slowly improve — around 40% of the 49 business associations surveyed by the German Economic Institute (IW) in the final weeks of 2025 expect higher sales and production in 2026, with another 40% expecting things to remain at the same level.

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One potential boost to growth in 2026, which is not included in the Bundesbank's forecast, relates to an increase in working days.

Workers in Germany will have an average of 250.5 work days in 2026, an increase of 2.4 days from 2025 and the highest figure since 2022, according to the country's statistics office. The increase is due to several public holidays falling on weekends in 2026.

According to ING bank, the increase might add up to 0.3% to German GDP for 2026, but they caution that it is not indicative of a long-term trend. The German Economic Institute — which does include the extra working days — predicts growth of 0.9% for 2026.

Beyond 2026, one area of nagging doubt relates to Germany's debt. When the German Council of Economic Experts issued its warning about government spending back in November, it said that government debt could rise to 85% of the GDP by 2035, up from 63% this year.

It said that if growth opportunities are lost, "the long-term debt sustainability of the German state could be jeopardised."

New German government borrowing is forecast to pass the €180 billion mark in 2026, more than 4% of GDP. The government expects its budget deficit — the difference between what it spends and takes in over a given year — to hit 4.75% of GDP in 2026.

Deutsche Bank, among others, has warned that as Germany's pension and interest costs rise considerably over the coming years, its debt levels and long-term borrowing plans will come under scrutiny and pressure.

"In light of the narrowing budgetary scope, the 2027 budget negotiations could become another test for government cohesion," it said.