The German economy has entered a phase of structural stagnation. Growth remained weak in 2025, following two consecutive years of recession. The export sector and industry as a whole are in crisis. The shift in fiscal policy at the beginning of the year, coupled with the relaxation of the debt brake rule, is expected to boost growth in 2026, but to what extent?
Key takeaways
- The short-term economic recovery faces some risks. Germany is experiencing a phase of structural stagnation after weak growth in 2025 and two preceding years of recession, with industry and exports in crisis. A large fiscal pivot — a €500bn off‑budget fund and extra borrowing for defence — aims to rebalance the economy and boost demand from 2026. In the longer term, we believe that reforms could enable stronger expansion from 2027 if they are accelerated decisively.
- We believe German equities have room to continue to deliver attractive returns in 2026 and even outperform European equities. Markets should begin to price in an improving earnings outlook, supported by fiscal stimulus and monetary easing, fading tariff risks and a more benign FX backdrop. Industrials and Financials — the largest sectors — are likely to benefit from higher defence and infrastructure spending.
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