Fiscal Stimulus and Policy Shifts Drive Ifo’s Upbeat Outlook for German Growth

Germany’s Ifo Institute has raised its economic growth forecasts, signaling a cautious shift after several stagnant years. Official figures now show Germany’s GDP will grow by 0.3% in 2025 and by 1.5% in 2026, up from previous projections of 0.2% and 0.8%.

The Ifo Institute, a leading economic research body, attributes this upgrade to new government policies and a marked increase in public spending. The German government has approved a €46 billion tax relief package for businesses, running from 2025 through 2029.

Lawmakers also relaxed borrowing rules for defense spending, allowing for a significant increase in government outlays. These measures aim to boost investment and reverse the persistent weakness seen in German industry since 2017.

After three years of near-zero growth and recession, the Ifo Institute reports that the economy reached its lowest point during the last winter. Fiscal stimulus is expected to add €10 billion in 2025 and €57 billion in 2026.

This extra spending should lift growth by 0.1 and 0.7 percentage points in those years, compared to a scenario without these measures. Despite these efforts, challenges remain.

Germany’s industrial sector still operates below capacity, and the government deficit will rise from 2.3% of GDP in 2025 to 3.4% in 2026. Inflation is forecast to stay close to the European Central Bank’s 2% target.

The real story is that Germany’s recovery depends on these fiscal measures working as intended. For businesses, this means new opportunities but also continued uncertainty as the country tries to regain its footing.

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