Reichstag, Oct. 2026: Gravitatas / Wikimedia Commons (CC0, cropped)
Germany’s economic advisers raised their growth forecasts Wednesday, projecting that stronger exports and government spending will help the economy expand 1.3% this year, while warning that rising defense costs and interest payments will force difficult budget decisions.
The German Council of Economic Experts expects real gross domestic product to grow 1.0% in 2027. The projections in its 2026/27 annual report are higher than the 0.5% growth for 2026 and 0.8% for 2027 forecast in its spring assessment. These are forecasts, not final measurements of economic growth.
The recovery is continuing despite higher energy prices. Exports and public spending are the main supports this year, the council said. Next year, it expects government and household consumption, along with government investment, to contribute to growth.
Higher prices and a widening budget gap
The council forecasts consumer-price inflation of 2.8% in 2026 and 3.3% in 2027, with rising energy prices adding pressure over the forecast period.
A stronger near-term growth outlook does not remove the longer-term strain on public finances. Federal spending has increased since the early 2020s as crisis measures, social-security commitments and subsidies expanded. Defense spending and interest costs are expected to add to that burden in the coming years.
“Capping expenditure growth in the federal budget is unavoidable,” council chair Monika Schnitzer said in the report announcement. She said consolidation should avoid hindering growth and distribute the burden fairly across generations and social groups.
Depending on the pace and extent of reductions in debt financing, the council estimates that the federal funding gap could reach between 2.7% and 4.8% of GDP in 2040. That range is a long-term scenario estimate, not a current budget deficit.
Defense borrowing proposal is advice, not policy
The council recommends gradually reducing the exemption that allows defense spending above a threshold to be financed through borrowing under Germany’s debt brake. It proposes raising that threshold from 1% of GDP by 0.25 percentage points each year starting in 2031, narrowing the amount eligible for borrowing.
The advisers want the phaseout path written into the Basic Law. This is the council’s recommendation, not an adopted government decision or a change already enacted in law.
Its proposed response to the fiscal gap also includes targeted subsidy cuts, structural changes to social insurance and a more efficient tax system. The council says decisions on the consolidation strategy and the speed of the borrowing phaseout should be made during the current legislative term.
Productivity remains a constraint
The report also points to large differences in productivity among German firms, including businesses in the same industry. Companies at the top of the productivity distribution are 3.5 to five times as productive as those at the bottom, according to the council.
Faster adoption of technology and knowledge, along with movement of workers and capital toward more productive companies, could help close that gap. The council presents those changes as a way to strengthen growth while Germany addresses its fiscal pressures.
JBizNews Desk | Berlin
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