Germany: Cautious growth outlook – ABN AMRO

ABN AMRO’s Chief Economist Germany, Alexander Krüger, notes that German economic output is rising and the bank has raised its Gross Domestic Product (GDP) growth forecast for 2026 to 1.3% and for 2027 to 1.1%. The bank projects inflation to move broadly back towards the 2.0% ECB target by spring 2027, but warns that risks to this outlook are tilted to the upside.

Resilient growth but structural headwinds

"Economic output is rising, but no decisive breakthrough is in sight. Still, we are raising our GDP growth forecast for 2026. The inflation rate is likely to hover just below 3.0% over the coming months."

"Against the backdrop of the ongoing Iran war, the German economy has remained resilient in the latest data releases. Solid GDP growth has now been recorded for three consecutive quarters. Nevertheless, the cumulative growth gap vis-à-vis other euro-area countries since the end of the Covid pandemic remains wide. This is unlikely to change any time soon, particularly as, in our view, the composition of GDP growth is not particularly encouraging. Growth continues to be driven to a significant extent by debt-financed government consumption."

"Nevertheless, we are becoming cautiously more optimistic about the growth outlook. Public investment, including defence investment spending, will continue to rise noticeably and support growth. However, we expect the spillover to other demand components to remain limited. In particular, the loss of purchasing power resulting from elevated energy prices, together with a more uncertain labour market outlook, will likely keep a lid on the recovery in private consumption."

"Taken together, these factors point to a growth trajectory ranging from subdued to solid. Partly reflecting statistical upward revisions – which raised cumulative growth over 2011–2021 by 0.8 percentage points – we have revised our GDP growth forecast for 2026 from 0.7% to 1.3% and for 2027 from 0.9% to 1.1% (working day adjusted: to 1% from 0.7%, 2027 unchanged at 1%). We continue to monitor potential disruptions from US tariff policy and supply-chain developments."

"We expect companies to pass through most of these higher costs to consumers. Against this backdrop, the inflation rate is likely to come in just below 3.0% this year. We expect inflation to move broadly back towards the 2.0% ECB inflation target by spring 2027. In our view, risks to the inflation outlook are tilted to the upside."