Projected German Economic Growth in 2026: Anticipated at 0.8 Percent, Threats of US Tariffs and Economic Crisis loom

The German economy, long renowned for its robust manufacturing sector, is currently grappling with a deteriorating competitive position, according to recent reports. This trend has been evident for several years, and the outlook remains uncertain.

The Ifo Business Climate Index suggests that companies within the German economy continue to assess their business situation as poor. This sentiment is further supported by data from the Federal Statistical Office, which reveals a decline in production since late 2022 until mid-2024.

The economic picture has darkened due to this downturn, but there are glimmers of hope on the horizon. For instance, expectations for the German economy have improved, potentially due to hopes for impulses from the extensive public investment program, which is not expected to take effect until 2026.

Monetary policy is expected to become more expansionary, which could contribute to a recovery in the German economy. Similarly, the world economy is projected to continue expanding at a moderate pace, with production set to increase by 2.6% in 2025 and 2.4% in 2026.

However, the German economy faces significant challenges. Exports to the U.S. have decreased due to the elimination of timing advantages, and building investments have significantly decreased in Germany. The strong U.S. tariff increases could dampen global trade and production, posing a significant risk to the German economy.

The IWH Leibniz Institute for Economic Research predicts a 0.8% increase in production for 2026 in Germany, following a 0.2% increase in 2025. Capacity utilization in the manufacturing sector has only slightly increased, despite a decrease in production.

The construction industry in Germany hopes to recover in the second half of 2026, as conditions for an economic recovery are considered quite favorable. Signs of stabilization in residential building permits and positive signals for growth from 2026 onwards offer some encouragement.

Despite these challenges, the labor market has not shown any signs of easing in the German economy. For the rest of 2026, somewhat stronger growth rates are expected due to investments in implementing new technologies.

However, the recovery seen in the winter may be interrupted, or the economy could still be in a recession, according to Oliver Holtemoeller, head of the macroeconomics department and vice president of the IWH. The significant increase in terms of trade due to the appreciation of the euro, not only against the U.S. dollar but also against the Chinese renminbi, offers some respite, but the uncertainty about the further development of foreign trade remains a significant risk.

In conclusion, the German economy faces a complex and challenging landscape, with a deteriorating manufacturing sector, decreasing exports, and significant risks from global trade uncertainties. However, there are also positive signs, such as improvements in expectations and the potential for recovery in the construction industry. The coming years will be critical in determining the course of the German economy.

Projected German Economic Growth in 2026: Anticipated at 0.8 Percent, Threats of US Tariffs and Economic Crisis loom