Germany’s economic recovery faces significant hurdles despite Chancellor Friedrich Merz’s promise of fiscal stimulus. While some indicators suggest a moderate upswing in 2026, economists and business groups warn that crucial structural reforms are lagging, potentially undermining sustainable growth. The International Monetary Fund forecasts 1.1% growth for Germany in 2026, and the government expects 1.3%, though this may be revised down to 1.0%. Investor morale improved in January, reaching its highest level since August 2021.
However, progress on implementing the €500 billion infrastructure fund has been slow, with only €24 billion invested by the end of last year. Concerns are rising that parts of the fund are being diverted to cover day-to-day spending rather than long-term growth projects. Deep-rooted structural issues, including red tape, demographics, and slow e-government implementation, also need urgent attention, according to economists.
The coalition government’s internal disagreements are further complicating the reform process. While Chancellor Merz advocates for a pro-business agenda, his Social Democrat (SPD) partners are wary of reforms that might erode workers’ rights. Disputes over pension changes and tax policy are hindering progress, with critical decisions on pensions, health insurance, and fiscal rules being deferred to commissions.
Despite these challenges, there are tentative signs of stabilisation in the industrial sector, with industrial production and orders showing consecutive monthly increases. However, industry capacity utilisation remains below the long-term average, indicating underutilised potential. Rising bankruptcies and a decline in consumer sentiment highlight the fragility of the recovery, underscoring the need for urgent action to address structural problems and foster a sustainable rebound.
