The German economy, Europe's largest, closed 2025 with increasing momentum, yet signs suggest that growth in the opening quarter of 2026 will likely be modest. This assessment was detailed by the Bundesbank in its January economic report released on Thursday. Germany has experienced a period of stagnation over recent years, challenged by an industrial recession and the impact of U.S. tariffs which curtailed export growth. The government's proactive fiscal spending has been the primary driver for hopeful economic improvement.
Recent survey data indicate that business sentiment has become slightly more cautious, which the Bundesbank interprets as a signal that economic output expansion in the early months of 2026 will be limited. Nonetheless, an expected easing of fiscal constraints is anticipated to provide a more substantial uplift in the latter part of the year.
Exports continue to face headwinds; however, signs point to industrial activity having reached a bottom. Consumer spending is firming, buoyed by significant wage increases, and the surge in domestic demand appears largely fueled by government efforts to increase defense-related expenditure.
This improved economic outlook represents a marked advancement compared to recent years. However, a government insider revealed to Reuters that the official growth forecast for 2026 is likely to be revised downward from an initial estimate of 1.3% to approximately 1.0%, reflecting the cautious near-term outlook.
Regarding inflation, the Bundesbank maintains an optimistic but measured forecast, expecting price growth in Germany to hover near the European Central Bank’s 2% inflation target in the upcoming months. Within the broader eurozone, inflation is projected to fall below 2%, primarily driven by declining energy prices, before rebounding next year as underlying domestic price pressures sustain.