Germany's Economic Path Forward Amid Global Uncertainty

As Germany enters 2026, the country faces a gradual but promising economic recovery, even as it navigates an array of complex global and domestic challenges.

Recent projections from the Bundesbank show a steady decline in inflation, forecasting the Harmonised Index of Consumer Prices (HICP) to reach 2.2% in 2026 and stabilize around 2% in subsequent years. Economic growth is also expected to improve, with GDP growth moving from a modest 0.3% in 2025 to 0.6% in 2026, accelerating to 1.3% in 2027 and 1.1% in 2028. This recovery is largely supported by expansionary fiscal policies, including increased government spending on defense and infrastructure and various tax cuts, which are set to boost household and business incomes.

However, the accompanying rise in government deficit and debt ratios highlights the need for careful fiscal management. While borrowing for critical investments is seen as necessary, the Bundesbank stresses the importance of ensuring this spending leads to concrete investments and maintaining the health of public finances in the future. Beyond fiscal policy, the expected revival in household demand is anticipated to play a pivotal role, although business investment remains subdued by ongoing uncertainties. German exports are also likely to recover gradually, but structural obstacles and persistent trade tensions are expected to limit their overall momentum. The result is a projection of the current account surplus narrowing in comparison to previous decades.

On the international stage, Germany's outlook remains closely tied to persistent global challenges, including geopolitical instability, trade disputes, rapid technological advances, and the pressing realities of climate change. Dr. Nagel, President of the Deutsche Bundesbank, underscores that sustainable solutions to these multifaceted issues require robust, rules-based international cooperation. Past experiences, such as the global response to financial crises through institutions like the Financial Stability Board and the International Monetary Fund, demonstrate the value of collaboration and shared standards. The ongoing rise of technologies like artificial intelligence and the push for a greener financial system exemplify how coordinated global action can address both risks and opportunities.

Looking ahead, the speech emphasizes that Germany's progress is contingent not only on sound economic policy at home but also on effective cooperation abroad. As the country recovers from recession, advancing innovation, strengthening resilience, and nurturing global partnerships will be essential to safeguarding stability and fostering sustainable growth. This outlook reinforces the significance of teamwork and consensus among nations in addressing the most pressing challenges of our time.