The Big Berlin Bill: Lifting growth forecasts for 2025 and 2026 – Deutsche Bank

This week the German government took a large step towards implementing the fiscal regime shift that it initiated with the historic reform of the debt brake, Deutsche Bank's economists report.

Germany unleashes 'Whatever It Takes” fiscal stimulus

"The government coalition agreed to borrow almost EUR 500bn to raise the defence budget to the new NATO target of 3.5% of GDP by 2029—sooner than the UK or France—and to borrow almost EUR 300bn for infrastructure over the same period. Jointly, this amounts to almost 20% of GDP in fiscal stimulus—unthinkable at the start of the year. By German standards, this truly is "whatever it takes" fiscal policy. Although parliament will only debate the budget law for this year in September, the private sector may assume that it will pass: the coalition has been running the budget process smoothly and cohesively in recent weeks."

"In the short term, the planned ramp-up in debt-financed spending is remarkably ambitious. The government plans a deficit of more than 3% of GDP as early as this year and almost 4% next year. In light of the front-loading of the fiscal expansion, we raise our growth forecast for 2025 to 0.5%. Not only is the fiscal impulse over this period likely to be more positive than we previously assumed, but the economy is also heading into this fiscal expansion with greater momentum than expected, navigating the tariff turmoil with surprising poise. It would now take a serious exogenous shock or escalation in the trade conflict to scupper the recovery this year."

"Moreover, we bring forward our 'terminal' growth forecast of 2.0% to 2026. By the end of that year, the fiscal impulse will amount to about 1.5% of GDP, with enough time for strong multiplier effects to kick in. However, we remain concerned that a deficit-fuelled growth spurt could start to peter out from 2027 onwards. At a growth rate of 2%, the German economy would close the output gap in 2026 and run the risk of overheating in the following years. While the planned investment spree in infrastructure and defence can plausibly raise the economy's potential growth rate from currently 0.5% to perhaps 1% through productivity gains, it cannot resolve the primary structural problem: the shrinking labour supply. It would take meaningful structural reforms to sustain a growth rate of 2%."