Germany's central bank expects the country's economic recovery to continue, albeit at a slower pace amid heightened inflation risks due to the energy price shock stemming from the ongoing war in the Middle East.
The economic rebound that began in the previous winter is initially anticipated to slow in 2026, with households' purchasing power and consumer spending weighed down by rising energy costs, the Deutsche Bundesbank said in its latest forecast for Germany published Friday.
German companies are facing weaker demand and higher bottlenecks due to supply chain disruptions caused by the war, while increased uncertainty and interest rates are also expected to adversely affect private investment.
Bundesbank President Joachim Nagel, however, is optimistic on Germany's ability to bounce back from the challenges presented by the war, saying "economic activity will gain traction again over our forecast horizon up to 2028. The recovery will be supported by falling energy prices, a strengthening global economy and, above all, strong stimulus from fiscal policy."
Germany's calendar-adjusted real gross domestic product is projected to expand by 0.5 % in 2026 and 0.8 % in 2027, before picking up to 1.4 % in 2028, bolstered by an expected gradual improvement in aggregate capacity utilization.
"Expansionary fiscal policy will be the only thing preventing a decline in gross domestic product (GDP) in the summer half-year ... Rising defence expenditure will be particularly important here," the Bundesbank noted. "After the weak summer half-year, economic activity will gradually gain momentum. It will be supported not only by continued fiscal expansion but also by falling energy prices and an improving global economy."
Meanwhile, the annual harmonized inflation rate is forecast to rise to 2.9% in 2026 from the previous year's 2.3%. It is then expected to decline to 2.7% in 2027 before easing to 1.9% in 2028.
