Germany's fiscal expansion would boost GDP from 2026, DIW says

By Maria Martinez

BERLIN (Reuters) - Germany's planned 500-billion-euro infrastructure fund could raise economic output by an average of more than two percentage points per year over the next 10 years, Germany's DIW economic institute said on Friday.

German chancellor-in-waiting Friedrich Merz was set to make a last-ditch attempt on Friday to convince the Greens of his plans for a massive increase in state borrowing to bolster defence and infrastructure.

DIW, one of Germany's main economic forecasters, cut its forecasts for Europe's largest economy on Friday for this year and next due to political uncertainty and global trade tensions.

Next year, gross domestic product will likely increase by 1.1%, down from the DIW's December forecast of 1.2%, the institute said. This forecast does not take into account defence and infrastructure expenditures.

If a defence and infrastructure spending ramp-up is included, growth of 2.1% is expected in 2026, DIW said.

The institute expects the economy to stagnate this year, revising its previous forecast for 0.2% growth. This is because the fiscal expansion would not have any impact in the current year.

One reason for the downward revision is private consumption, which is developing more weakly than expected in Germany despite rising real wages, DIW said.

Many people in Germany are holding back on major purchases due to the tense global political situation and job security concerns, it added.

The IfW institute revised up its 2026 estimate for Germany, predicting 1.5% growth off the back of the expected boom in public spending. Like the DIW, it also expects a stagnation this year.

In 2024, Germany became the only G7 country to post a contraction for two consecutive years.

Strengthening public investment and reducing economic uncertainty should be a top priority for the new German government, said DIW president Marcel Fratzscher on Friday in the presentation of the new forecasts.

"Although special funds are not the ideal solution, they could offer a pragmatic approach to compensate for Germany's investment weakness and pull the German economy out of the crisis," Fratzscher said.

Merz has justified the need to push the constitutional amendments through the outgoing parliament with the recent shift in policy in the United States under President Donald Trump, warning that a hostile Russia and an unreliable U.S. could leave the continent exposed.

"The loss of the U.S. as a reliable political partner poses major challenges for the future German government and exacerbates the already difficult situation, especially for export-oriented companies," said Dany-Knedlik.

(Reporting by Maria Martinez, Klaus Lauer and Christian Kraemer; Editing by Rachel More and Toby Chopra)