Germany Economy: 1% Growth Forecast & Reform Needs

Berlin – Germany’s economy is projected to experience modest growth of 1% in 2026, a slight upward revision from previous forecasts, but significant structural reforms are urgently needed to ensure sustained recovery, according to the German Chamber of Industry and Commerce (DIHK). The assessment, released on Tuesday, February 17th, highlights ongoing challenges facing Europe’s largest economy, including geopolitical uncertainty, high operating costs, and subdued domestic demand.

While the 1% growth forecast represents an improvement over the earlier projection of 0.7%, DIHK Managing Director Helena Melnikov cautioned that it remains insufficient. That is too little. our competitors are more dynamic, she stated, underscoring the need for increased competitiveness. The growth is largely attributed to statistical effects and calendar adjustments rather than a fundamental strengthening of the economic foundations.

The DIHK’s business climate index, based on a survey of approximately 26,000 firms across various sectors and regions, showed a slight increase to 95.9 points. However, this figure remains considerably below its long-term average of 110, indicating persistent concerns among businesses. The chamber’s assessment paints a picture of an economy still grappling with significant headwinds, despite some signs of stabilization in the manufacturing sector.

Goldman Sachs Research offers a more optimistic outlook, forecasting growth of 1.1% for this year, marking the end of six years of economic stagnation. This projection is driven by expansionary fiscal policy aimed at boosting domestic demand. According to Goldman Sachs economist Niklas Garnadt, About half of this year’s growth should come from expansionary fiscal policy that we expect to boost domestic demand significantly. The firm notes that the German economy grew by just 0.3% in 2025 and has largely stagnated since 2018.

The shift towards increased government spending, facilitated by amendments to the debt brake rule last March, is intended to support higher defense spending and infrastructure investment. This policy change is seen as a key factor in stimulating economic activity. However, the Goldman Sachs report also acknowledges that manufacturing, while stabilizing, continues to face headwinds, particularly from increasing competition from China.

The DIHK report identifies several key risks cited by businesses, including weak domestic demand (cited by 59% of firms), rising labor costs (59%), uncertain economic policies (58%), and high energy and raw material prices (48%). Investment plans remain subdued, with 23% of firms intending to increase investment, while 31% plan cuts. This cautious approach to investment reflects the ongoing uncertainty surrounding the economic outlook.

Melnikov emphasized the need for swift and decisive reforms to address these challenges. With the handbrake on, we won’t get out of the valley, she warned, calling for measures to reduce bureaucracy and lower labor and energy costs. The DIHK’s assessment suggests that without significant structural changes, Germany’s economic recovery will remain fragile and vulnerable to external shocks.

The Goldman Sachs analysis suggests that the drag on growth from US tariffs should diminish, but competition from China is expected to continue weighing on exports. This highlights the complex interplay of global economic forces impacting Germany’s economic performance. The 1.1% growth forecast is slightly above the current consensus forecast of 1% (as of January 9th, 2026) and meaningfully above Goldman Sachs’ previous estimate of 0.5%.

The German economy’s performance has significant implications for the wider Eurozone, as Germany is its largest economy. A sustained period of weak growth in Germany could dampen economic activity across the region. The calls for structural reforms underscore the need for long-term solutions to address the underlying challenges facing the German economy and ensure its future competitiveness.

The focus on subsidies, social spending, and tax reductions as part of the government’s fiscal rollout is a departure from earlier plans, and is seen as a more effective way to stimulate demand. However, the success of these measures will depend on their efficient implementation and their ability to address the concerns of businesses regarding high costs and regulatory burdens.

The DIHK’s assessment serves as a stark reminder that despite the modest upward revision in growth forecasts, Germany’s economic recovery remains precarious. The need for comprehensive reforms to address structural weaknesses and enhance competitiveness is paramount to ensuring a sustainable and robust economic future.