Ifo Raises Germany’s 2026 Growth Forecast to 1.4% on Fiscal and Export Support

Germany’s economic recovery received a sizeable upgrade on Thursday after the Ifo Institute raised its forecast for 2026 growth to 1.4%, up from 0.8% in its June projection. The Munich-based research institute said stronger support from fiscal policy and improving demand from abroad are now expected to offset more of the drag from higher energy prices and low water levels on German rivers.

Ifo also lifted its 2027 growth forecast to 1.2% from 0.8%, while projecting a moderation to 0.8% in 2028. The revision does not mean Germany has escaped its underlying constraints. Household demand remains subdued, inflation is elevated, and demographic pressures continue to weigh on the labor supply. The new outlook instead rests on a stronger starting point for the economy and more powerful policy and export support than Ifo assumed at the start of the summer.

The institute said revisions to historical data from Germany’s Federal Statistical Office, together with a reassessment of the economy’s underlying momentum, contributed to the upgrade. Ifo’s autumn economic forecast also assigns greater weight to the boost from government spending and foreign demand, while judging the negative effect of the energy-price shock to be less severe than previously expected.

Exports and a stronger second quarter improve the starting point

Recent official data give the forecast a firmer base. Germany’s gross domestic product increased 0.3% in the second quarter from the previous quarter after adjustments for prices, seasonal effects and calendar effects, according to detailed figures from Destatis. That was 0.1 percentage point stronger than the agency’s preliminary estimate and followed 0.4% growth in the first quarter.

Foreign trade did much of the work. Price-adjusted exports of goods and services rose 2.0% from the first quarter, with goods exports up 2.6%. Compared with the second quarter of 2025, total exports increased 3.7% and goods exports climbed 5.0%. Destatis said exports to other European Union countries were particularly strong. By contrast, equipment investment fell 1.4% from the previous quarter, illustrating how uneven the recovery still is.

Business surveys have also become more supportive of the export story. Ifo’s export expectations index jumped to 9.6 points in August from minus 2.8 in July, its highest level since February 2022. The institute reported especially upbeat expectations among producers of electrical equipment, data-processing equipment and electronic and optical products. Automakers also became more optimistic about foreign sales, although Ifo said exports to China remained weak.

That improvement matters for an economy whose industrial sector has struggled with weak demand and high energy costs. Ifo now expects manufacturing output and exports to make a meaningful contribution to the recovery over the rest of its forecast horizon. The institute’s latest business-climate survey also showed companies were more satisfied with current conditions in August and had turned less pessimistic about the months ahead.

Fiscal support is doing more of the heavy lifting

Government spending is the other major pillar of Ifo’s upgrade. The institute estimates that additional fiscal measures will provide just under €40 billion of stimulus in 2026, followed by about €27 billion in 2027 and €18 billion in 2028. Spending on infrastructure, climate neutrality and defense is expected to lift both public consumption and public investment.

That support is consistent with the broader investment push embedded in Germany’s fiscal plans. The Federal Ministry of Finance has projected €126.7 billion of government investment for 2026, including spending from the core budget, the Special Fund for Infrastructure and Climate Neutrality, and the Climate and Transformation Fund. The figure is a wider investment envelope than Ifo’s estimate of the incremental fiscal impulse, but both point to a public sector that is contributing more directly to demand.

The stronger fiscal stance also comes with a larger deficit. Ifo expects Germany’s general government shortfall to equal 4.0% of GDP in 2026, rising to 4.6% in both 2027 and 2028. Gross government debt is projected to increase from 62.7% of GDP in 2025 to 67.9% by 2028. Destatis has already reported a €71.3 billion general government deficit for the first half of 2026, equivalent to 3.1% of GDP for that period, as spending rose faster than revenue.

For the near-term growth outlook, the extra spending helps cushion private-sector weakness. It does not remove Germany’s longer-running structural problems, however. Ifo said labor shortages linked to demographic change and only modest productivity gains are holding back potential growth. The institute expects the economy’s current spare capacity to be largely used up by the middle of 2027, limiting how much faster output can expand without stronger improvements in productive capacity.

Inflation and energy costs remain the main restraints

The more optimistic growth forecast arrives alongside a difficult inflation picture. Ifo expects consumer prices to rise 2.8% in 2026 and 3.0% in 2027 before inflation eases to 2.3% in 2028. Private consumption is therefore expected to remain restrained as higher prices limit gains in household purchasing power.

Recent inflation data point in the same direction. Destatis estimated Germany’s annual inflation rate at 2.9% in August, up from 2.8% in July. Energy prices were provisionally 10.5% higher than a year earlier, while core inflation excluding food and energy was estimated at 2.4%. Ifo said renewed increases in energy prices following the end of the ceasefire in the Iran conflict are one of the main risks to its forecast.

Low river levels add another supply-side complication. Ifo warned that record-low water levels could disrupt production in sectors that depend heavily on river transport. A further escalation in the Middle East could also push global energy prices higher and increase the risk of supply bottlenecks, while a faster decline in energy prices would improve the outlook.

The labor market is expected to lag the broader recovery. Ifo projects average employment at about 45.69 million in 2026, below 45.88 million in 2025, with the unemployment rate holding at 6.3%. Employment is forecast to rise again in 2027 and 2028 as activity strengthens, while the unemployment rate declines to 5.4% by 2028.

For 2026, the main change is therefore not the disappearance of Germany’s economic risks but the amount of support standing against them. Stronger exports and a more expansionary fiscal stance have raised Ifo’s estimate of growth by 0.6 percentage point since June, even as energy costs continue to squeeze consumers and businesses. The recovery is now expected to be stronger this year, but Ifo’s forecast still shows growth slowing after 2026 as fiscal stimulus fades and the economy runs into its underlying capacity limits.