Germany Pares Back 2026 Growth Call to 1% – Recovery’s Real, Just a Lot Slower Than Hoped

With input from the Financial Times, ABC News, and Bloomberg.

The German government quietly cooled its optimism on Wednesday: instead of the 1.3% expansion it penciled in last autumn, Berlin now expects the economy to grow by roughly 1% in 2026 (and about 1.3% in 2027). That downgrade is small in headline terms but says a lot about how hard it is to kick-start Europe’s largest economy after years of sluggishness.

Why the pullback? Short version: the government’s big spending and reform push is real, but it hasn’t translated into a snap surge in activity. Economy Minister Katherina Reiche said the impulse from recent fiscal and policy measures “wasn’t realized quite as quickly and to the extent that we assumed,” even as she insisted the data now points to a “clear recovery.” In plain English: the plan is working, just not at the speed Merz’s coalition hoped.

A little context: Germany only managed 0.2% growth in 2025 – a modest return to positive territory after two years of contraction. The new 1% call for 2026 isn’t a collapse, but it is a reminder that reviving an industrial, export-heavy economy is a marathon, not a sprint.

So what’s slowing things down?

• The big-ticket spending – a €500 billion infrastructure and investment fund aimed at fixing roads, bridges and digital networks – exists on paper, but disbursement has been slow. That money is supposed to turbocharge growth, but budgets are flowing sluggishly through Germany’s federal system, so the fiscal boost hasn’t fully landed yet.
• Structural headwinds remain: higher energy costs after Russia’s invasion of Ukraine, stiffer competition from cheap, fast-moving Chinese manufacturers, and rising trade uncertainty abroad (including threats of US tariffs) all keep a lid on exports – Germany’s traditional engine.

Berlin’s toolkit is familiar: loosen rules, speed up permitting, subsidize energy prices for heavy industry, pump money into digitization and defense, and try to get the public investment train moving faster. Finance Minister Lars Klingbeil and others have publicly urged a quicker rollout – essentially saying, “spend the money so it can actually boost the economy.” But implementation is proving stickier than the political rhetoric suggested.

Government spending should eventually matter. Officials argue that much of 2026’s growth will be driven by public outlays (infrastructure and defense), so even if private-sector momentum is patchy now, fiscal stimulus can keep the country on a slow upward track – provided the projects actually get off the ground. Bloomberg and other analysts have also flagged the same pattern: state-led investment is the dominant short-term driver.

A 1% year is bland but not disastrous. It buys time for reforms and keeps unemployment from flaring up, but it’s not strong enough to meaningfully close the productivity gap or supercharge wages. For German firms that live and die by export cycles – automakers, capital goods, machinery – a tepid expansion means cautious hiring and cautious investment. The risk is that temporary fixes and big-ticket spending make headlines while deeper reforms (training, digital rollout, permitting reform) lag – which would leave long-term competitiveness untouched.

The downside risks are real and obvious: a sharper-than-expected global slowdown, fresh trade barriers, or a spike in energy prices could knock the recovery sideways. On the flip side, faster-than-expected disbursement of the investment fund or a pickup in global demand would make the 1% call look conservative.

Chancellor Friedrich Merz and his coalition have the right headline tools – cash, projects, and permission to spend more on defense – but turning billions of euros of political capital into machines, factories and digital networks takes time. For now, Germany’s recovery is happening, but it’s happening at the tempo of bureaucracy and construction schedules rather than the pace of headlines. Keep an eye on how fast the cash moves – that will tell you whether 2026 ends up barely okay or actually starts to feel like a turnaround.