November 25, 2025
Setting Off with Uncertainties
Developments of the year and a well-founded outlook: Read our experts’ analyses and forecasts on economy here.
The 2026 Annual Outlook – Economy
- Dr. Jens-Oliver Niklasch · Strategy / Macro Research
Three years of stagnation are now behind Germany. In 2025, real GDP was roughly at the same level as in 2019. However, growth may at last pick up next year. There are reasons for optimism: since 2003, the ECB has halved its key interest rates to 2%, which should have a positive effect on economic activity. For the optimists, the trump card is fiscal policy. The deficit ratio stood at 2.8% of GDP in 2024. According to Bundesbank estimates, it could temporarily decline in 2025, only to rise to 4% in the following two years. The federal government is accumulating debt, both in the core budget and through special funds, to increase defense and investment spending. We expect this stimulus to boost economic output by 0.8% next year. This effect could be even greater were it not for the fact that some of the special funds support consumption rather than investments, and that the core budget increasingly reflects a system in which regular capex expenditures are reallocated to special funds, undermining their original purpose of funding additional investments. An additional calendar effect (from the timing of holidays) is expected to push GDP up by nearly 0.3 percentage points.
The risks for 2026, on the other hand, are all too familiar: U.S. trade policy has disrupted Germany's trade engine by increasing import tariffs. Exports to the U.S., hitherto Germany’s most important export destination, are now declining. Further measures are also conceivable. Since the start of his second term, U.S. President Donald Trump has displayed a strong interventionist tendency, with no signs of letting up. Also high on the risk list: There are still no signs of an end to the war in Ukraine.
Inflation, however, seems to be under control. At just over 2%, it is hovering near the ECB’s target. This is likely to support real incomes and household consumption. Price levels in upstream stages are also largely stable. The labor market, however, still bears the scars of recent lean years. Unemployment is edging upwards towards the three-million mark, with no reversal in sight.
Germany has been in stagnation for three years
Ifo Business Climate and GDP year-on-year comparison
Key questions from clients answered by our experts
Will CO2-prices mean higher inflation?
Currently, the CO2 price for fuels is set at €55 per ton. In 2026, the allowed trading range will be €55-65, before market pricing begins in 2027. As a result, fuel prices could increase by up to 10% in 2026. If the increase is fully passed on to household energy costs, inflation could temporarily rise by up to one per cent.
Is a new debt crisis looming in the Eurozone?
The budget deficit of France is too high, but not as excessive as in Greece back then (10% to 15% from 2008-2011). Moreover, with the European Stability Mechanism (ESM) and potential ECB bond purchases, the EU’s institutions are better equipped to handle a debt crisis nowadays. Nevertheless, France needs to consolidate its finances to avoid losing the market’s trust.
Dr. Jens-Oliver Niklasch · Strategy / Macro Research
The 2026 Annual Outlook – eight topics in focus
The 2026 annual outlook – PDF download
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3.3 MB | 25.11.2025
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