German economy: DIW significantly raises forecast

Why the DIW is raising the growth forecast

After years of weak economic activity, the outlook for the German economy is improving. Following a strong first half of the year, the German Institute for Economic Research (DIW) expects growth of 1.2% for 2026, as the institute in Berlin announced. For 2027, the economic researchers expect 1.0%, and for 2028 0.7%.

This means the DIW has more than doubled its forecast from June. At that time, growth of only 0.5% had been expected for 2026. As reasons, the institute cites surprisingly strong foreign trade and an energy price shock as a result of the Iran war that is turning out to be smaller than initially feared.

“The German economy is facing a possible turning point toward stronger growth in the coming two years,” said DIW President Marcel Fratzscher. In his assessment, the state has a significant share in this. “Around 70 percent of economic growth this year is due to public consumption and investment.”

In addition to rising spending on health, care, and pensions, higher investment in infrastructure and defense is therefore supporting the economy.

Bundesbank becomes more optimistic about the German economy

The Bundesbank also expects stronger growth for 2026 than previously. Based on the first two quarters, Germany is “well on track to reach about one percent this year, which is significantly better than our forecast from June,” Bundesbank President Joachim Nagel told the French newspaper “Le Monde.”

As recently as June, the Bundesbank had forecast an increase of 0.5 % for the current year adjusted for prices and the calendar. Growth was still not particularly high, Nagel acknowledged. However, export figures had recently been solid and incoming orders in manufacturing had been satisfactory.

Which indicators point to a trend reversal

Gross domestic product increased in the first two quarters of the current year compared with the respective previous quarter by 0.4 % and 0.3 %, respectively. The German economy received tailwind from exports, which reached record levels in June.

Economic output had already grown in the final quarter of 2025. Growth of around 1 % for the year as a whole would still not be a strong upswing, but significantly more than the increase of 0.2 % in 2025 after two previous years of a shrinking economy.

The Ifo business climate index also signals better sentiment. It rose in August for the fourth month in a row.

Why the recovery of the German economy remains fragile

Despite the improved outlook, the DIW warns of structural and cyclical risks. “Private investment continues to be insufficient to sustainably strengthen Germany's competitiveness and innovative capacity,” Fratzscher said.

In addition, there are global uncertainties. “An escalation in the Middle East or new trade conflicts could slow the recovery again.” Nevertheless, there is reason for “cautious optimism.”

DIW chief economist Geraldine Dany-Knedlik also does not yet see a stable growth phase: “The German economy is recovering somewhat better this year than thought, but it is still standing on somewhat shaky legs.”

For the third quarter, the DIW expects only stagnation. Expensive energy and low water levels are weighing on the chemical and metal industries, among others. According to the institute, high gas prices in particular remain a risk for the winter.

Bundesbank president warns against exiting the euro

In addition to the economic outlook, Bundesbank President Nagel commented on the strengthening of populist parties. With regard to the AfD, he said: “There are people in Germany who claim to be patriots and at the same time propose giving up the euro. I must remind them that Germany has attained enormous prosperity thanks to the single currency - just like France and the entire monetary union.”

In Nagel's assessment, a step toward a dissolution of the monetary union would be irresponsible and extremely dangerous. “I am sincerely concerned that people in Germany - and elsewhere - are considering such a path.”

Why Sewing warns against economic isolation

Deutsche Bank CEO Christian Sewing also warned a few days before the state election in Saxony-Anhalt about the rise of populist parties. “Populist parties pretend to have simple answers,” Sewing said at the “Handelsblatt Banking Summit” in Frankfurt.

“In fact, they advocate concepts that run counter to the foundations of our success: openness, diversity, a strong Europe, reliable institutions and international cooperation.”

With regard to the AfD, Sewing described a course of isolation and nationalism as wrong for Germany. An exit from the euro would be “poison for German prosperity.” The Deutsche Bank chief also warned: “Isolation, nationalism and stoking mistrust do not solve a single one of our problems.”

Without growth, in his assessment distribution conflicts would become harsher, the state's room for maneuver narrower and trust in democracy's ability to act weaker.

With material from dpa