November 28, 2025
Outlook 2026: Choppy waters ahead!
We’re in for another year of headwinds.
To the point!
We’re in for another year of headwinds
This week, LBBW Research published its outlook for the new year. Here’s a quick tour through our forecasts. You can find the full 2026 annual outlook with all its cross currents here .
Growth returns to Germany’s economy
First, the good news: after treading water at roughly the same real level as in 2019, the economy should return to modest growth next year. We don’t expect anything breathtaking – calendar-adjusted, we predict a mild expansion of 0.8%. Because more public holidays will fall on weekends than in 2025, the unadjusted rate could even be top 1%.
What’s behind that? Business and consumer sentiment remain subdued. In truth, the growth impulse stems mainly from the federal government’s expansionary budget stance. After the debt brake was relaxed this spring, the German government is going all in, moving ahead with its investment program and higher defense outlays. Whether the government can actually deploy the earmarked funds, given capacity constraints in construction and the defense industry, is another question. But a positive impulse is likely regardless.
Set against that is the lingering uncertainty for exporters. The United States is Germany’s most important export destination. The so-called EU-U.S. trade “deal” rests on empty promises from Brussels: neither the pledged volumes of U.S. energy imports nor the scale of European firms’ direct investment look remotely plausible. If and when President Donald Trump figures out that none of this is materializing, expect him to harden his stance on tariffs once again. His capricious trade policy makes reliable planning exceptionally hard for companies. That Sword of Damocles will likely hang over us well beyond the upcoming year.
Calm returns to the ECB, but the Fed faces a tougher test
Inflation in the euro area is now well anchored. Headline prices may flicker briefly when the CO2 price rises in Germany as scheduled next year, but that should be a one-off effect. Barring surprises, the ECB will keep its powder dry and refrain from further rate moves at least through the end of 2026.
It’s a different story across the Atlantic. There, LBBW Research – deviating from market consensus – expects the inflation rate to rise to an annual average of 3.5%. U.S. firms have so far passed through only a small portion of tariff increases to consumers, so that chapter is not yet closed. A further weakening of the dollar – we see the exchange rate at 1.22 euros by end-2026 – adds a mild inflationary tilt. On top of that, the mass expulsion of undocumented migrants is thinning labor supply in sectors such as agriculture, hospitality and restaurants. That should be pushing up wages and prices in those industries. The Federal Reserve will therefore have less room to cut rates than markets currently expect. We forecast only two small rate reductions by the end of 2026.
The noise from the White House is something the central bankers will endure even after a new Fed chair is installed. The independence of this body appears secure – for now – despite Trump’s best efforts to erode it.
At the long end of the curve, however, we see further increases in government and corporate bond yields. This is driven by an increasing supply of government bonds on both side of the Atlantic. It would be unduly alarmist to predict a sovereign debt crisis, but one thing is also clear: the sustainability of public finances is at increasing risk. This is one of the drivers of an ongoing gold rallye.
Equities: the fat years are over
Equity markets in Europe and the U.S. did brilliantly again in 2025. But we think it’s increasingly likely that investor expectations have gotten ahead of themselves. The risk of corrections is rising. Never has the U.S. market been driven by so few names: more than 40% of the S&P 500’s market cap is concentrated in the top ten stocks. Almost all of them are riding the same AI wave. The broader market is by historical standards expensive, too. That holds also true for the stock markets in Europe and Germany. This is not easy to square with heightened uncertainty and a slowing global economy. The German stock index has had a three year with average annual returns around 20%. During those years, the index never dropped below its level at the start of the year. Such an environment may seduce investors into an overly complacent mood. We don’t forecast a crash, but in the coming years equity investors will have to set their sights much lower.
Central Forecasts
| 2025 | 2026 | |
|---|---|---|
| 🇩🇪 GDP growth | 0,2 % | 0,8 % |
| 🇩🇪 Inflation | 2,1 % | 2,3 % |
| 🇪🇺 EZB Rate* | 2,0 % | 2,0 % |
| 🇺🇸 GDP growth | 2,0 % | 1,5 % |
| 🇺🇸 Inflation | 2,8 % | 3,5 % |
| 🇺🇸 Fed Rate* | 3,75 % | 3,5 % |
| 🇩🇪 DAX* | 24.000 | 25.000 |
| 🇺🇸 S&P500* | 6.700 | 6.800 |
| 🪙 Gold* | $4.200 | $4.600 |
| 🛢️ Oil (Brent)* | $65 | $60 |
| 💶 Dollar/Euro* | 1,18 | 1,22 |
* refers to year-end forecasts | Source: LBBW Research
Dr. Moritz Kraemer, Chief Economist / Head of Research at LBBW
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The 2026 Annual Outlook: Choppy Waters Ahead
In the 2026 Annual Outlook, LBBW Research experts analyze the past year’s developments and provide a well-founded outlook.
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