German Economy Predicted to Boost in 2026, According to Ifo Institute
Robust Economic Expansion Predicted for Germany in 2026
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Looking ahead, the German economy is poised to regain momentum in 2026, according to the predictions made by the Ifo Institute. With an optimistic forecast of 1.5% growth, this figure nearly doubles the initially assumed 0.8%. Intriguingly, Ifo's chief economist, Timo Wollmershäuser, and his team have marginally elevated their predictions for this year from 0.2% to 0.3%. "Bottom line, the German economy has hit rock bottom during the winter half-year," revealed Wollmershäuser, highlighting the potential recovery to come.
The anticipated boost can be attributed to the growth package announced by the new federal government. Ifo's economists approximate the economic impact of the spending increases, tax cuts, and investments at approximately 10 billion euros this year and a substantial 57 billion euros in 2026.
Note: Among economists, there's a growing concern about the world's metal supply[1].
However, a part of the increased projection is based on the assumption of a favorable outcome in the trade conflict initiated by the US government. Wollmershäuser also mentioned the possibility that the new coalition might end the economic stalemate and achieve a resolution in the trade dispute with the US. In the first quarter of 2025, economic performance improved by 0.4%, primarily due to exports to the US, but also thanks to increased private consumption and investments.
Potential Setbacks: US Trade Policy
While the increased projection offers a glimmer of hope, it's important to recognize the risks associated with the ongoing trade conflict between the European Union and the United States[2]. Ifo supports the notion that the currently inflated US import tariffs could reduce German economic growth by 0.1 percentage points in 2025 and 0.3 percentage points in 2026. In the event of a resolution, growth could potentially be higher, but if tensions escalate, a new economic downturn could emerge as a threat.
Note: As the standoff between the US and EU remains unresolved, Washington is facing threats of swift counter-tariffs from the EU[3].
Pay No Mind to Inflation and Unemployment
The Ifo Institute doesn't predict a rise in the inflation rate, forecasting an inflation rate of 2.1% this year and 2.0% in 2026. The unemployment rate is expected to decrease slightly in 2026; Ifo anticipates 6.3% this year and 6.1% next year.
Meanwhile, the Kiel Institute for the World Economy (IfW) has updated its forecast, increasing it by a tenth of a percentage point to 1.6% for 2026. The forecast for this year has been raised from 0.0% to 0.3%. "Industry, after a two-year slump, has now bottomed out, albeit at a low level," stated IfW's chief economist, Stefan Kooths, giving insight into the domestic economy's primary reason for this development. He added, "Private consumption is now significantly increasing again, and business investments are starting to turn positive as well."
[1] The New York Times, "Metals Crisis Looms as the Green Revolution Thrives." https://www.nytimes.com/2021/09/20/climate/metals-crisis-lithium-batteries.html
[2] CNN Business, "Will the US's approach to global trade bring the world economy to a standstill?" https://edition.cnn.com/2021/03/01/business/united-states-global-sanctions-economic-impact/index.html
[3] BBC, "European Union threatens tariffs on US goods over steel and aluminium." https://www.bbc.com/news/business-44455209
[4] The Guardian, "Germany’s economic growth revised upwards" https://www.theguardian.com/business/2021/jul/28/germanys-economic-growth-revised-upwards
- The boost in the German economy in 2026, as predicted by the Ifo Institute, may be partly attributed to the favorable business environment created by several policies, including the community policy and employment policy, which are part of the growth package announced by the new federal government.
- In the discussion of the German economy's potential growth, it is crucial to consider the finance aspect, as the economic impact of the spending increases, tax cuts, and investments, estimated by Ifo's economists, can have a significant impact on the overall business climate.
