German Economy on the Upswing - Global Economy Continues to Grow Moderately

Abstract

After three years of subdued economic activity, the German economy is on the road to recovery. While the Iran war and erratic U.S. trade policy are weighing on growth, their impact is only moderate. Although the U.S. Supreme Court has ruled that U.S. tariffs are unlawful, this does not change the tariff rates imposed on German exports, as the agreement with the European Union is assumed to remain in effect. The recent rise in energy prices resulting from the escalation in the Middle East is also significantly lower than during the energy price crisis of 2022/23. Germany is less dependent today on fossil fuels from the Gulf region than it was then on gas and oil from Russia. Assuming that the sharpest price surge has already occurred and that oil and gas prices will now rise only moderately, they are expected to increase inflation by 0.4 percentage points this year and dampen growth by 0.1 to 0.2 percentage points. Overall, this will slow down the recovery of the German economy but not halt it: The upturn continues to be driven by the domestic economy, while the export-oriented sector will only slowly regain momentum in the face of structural weaknesses and global uncertainty. The German economy grew by 0.2 percent in 2025, supported primarily by strong private and public consumption. By year-end, activity had picked up noticeably, and the upswing is continuing into early 2026, albeit at a more moderate pace. Growth is expected to remain positive, underpinned primarily by ongoing expansionary fiscal measures: Public consumption remains strong, and government investment is gradually picking up – initially in defense, later in infrastructure. Private consumption continues to benefit from the resilient labor market, while foreign trade remains weak due to declining competitiveness, the burden of U.S. tariffs, and global uncertainty. Higher energy prices are temporarily slowing growth slightly. The DIW Berlin projects growth of 1.0 percent for 2026 and 1.4 percent for 2027. The inflation rate is expected to be 2.4 percent in 2026 and 2.3 percent in 2027; further interest rate hikes by the European Central Bank are not foreseeable. The swift deployment of public funds remains crucial. The risks cut both ways: Faster project implementation could boost growth, while delays and capacity bottlenecks would slow it down. In terms of foreign trade, U.S. tariffs and geopolitical tensions remain key sources of uncertainty, while a de-escalation in the Middle East could bring relief in the form of falling energy prices. The global economy is expected to continue expanding moderately over the forecast period, growing by around 3.3 percent this year and next. While slightly expansionary fiscal policies in many countries are supporting demand, protectionist U.S. trade policies and the Iran war are dampening growth momentum, particularly starting in the second quarter of 2026. Regions with a high dependence on energy imports are particularly affected.