Germany recovery outlook improves as fiscal stimulus lifts growth

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Germany recovery outlook improves

Highlights

Germany's relaxed debt brake enables increased fiscal stimulus, with GDP projected to rise 1% in 2024 and accelerate to 1.3% by 2028, according to Goldman Sachs.
Defence spending increases are materializing faster than infrastructure investments, with Panmure Liberum noting that by July 2026, capital investment remains below last year's levels.
UBS observes clear signs of higher defence and early-stage infrastructure activity, while Goldman Sachs forecasts 17% German corporate earnings growth in 2027, outpacing broader European indices.

Stimulus effects emerge across growth and markets

As reported by Financial Times, Germany has returned to growth after Chancellor Friedrich Merz relaxed the country’s debt brake for defence and infrastructure spending in 2025, giving Berlin more fiscal room than the UK to support the economy.

Goldman Sachs strategists expect German GDP to rise by about 1 per cent this year, with growth accelerating to 1.3 per cent by 2028. Exports are a relative bright spot, rising 2 per cent quarter on quarter in the second quarter of 2026.

The spending push is not yet moving at full speed, especially in infrastructure. Panmure Liberum says that at the end of July 2026, investment in goods, land and equipment remains below the level of the previous year, reflecting how large civil projects take longer to plan, approve and build than defence procurement.

UBS, which tracks the fiscal stimulus through indicators such as surveys, sentiment and company order books, says there are clear signs of higher defence spending and early signs of increased activity in infrastructure. That is starting to support earnings expectations for German companies, with analysts forecasting 17 per cent earnings per share growth in 2027, about twice the rate expected for the broader European stock market index, according to Goldman Sachs. Siemens Energy and Thyssenkrupp are among the companies benefiting from that market momentum.

Political risks cloud broader economic gains

Despite the more positive macroeconomic picture, the recovery is not yet translating into stronger public confidence. Consumer sentiment remains weak, and Germany’s traditional manufacturing base continues to struggle.

Volkswagen underlines that pressure after falling out of the Euro Stoxx 50 index on Monday as its shares drop to a 16-year low. The gap between improving headline growth and poor sentiment suggests government spending may not yet be reaching households clearly enough to shift the political mood.

The broader risk is that political instability interrupts the recovery before it becomes more widely felt. Concerns include possible delays to structural reforms such as pension changes and the chance that uncertainty slows corporate investment, potentially weakening the momentum that fiscal support is beginning to build.

Our earlier article on Canada’s Building Canada Strong Act explained how Ottawa aims to speed up major infrastructure and resource projects by capping federal reviews at one year once a complete application is filed. It also outlined the bill’s focus on strengthening trade corridors and ports and updating labour rules, with the government arguing that faster approvals can coexist with environmental standards and Indigenous rights protections.

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