Germany lifts growth forecast on spending support

Much of the improvement is being manufactured by the state itself. Berlin is leaning on debt-financed spending for infrastructure and defense, while exports to the EU single market are also adding support. Private consumption, by contrast, is still expected to advance just 0.3% this year, even after real wages have been recovering. Private investment is not expected to pick up meaningfully until next year, a warning sign for any sustainable expansion because business spending is what usually turns a rebound into a cycle.

That makes the government’s more upbeat tone economically important, but also fragile. The ministry said the path ahead depends heavily on the wars in Ukraine and the Middle East. A durable easing in those conflicts would likely bring energy prices down and give households and companies more room to spend and invest. If not, elevated fuel and raw-material costs could keep pressure on margins, consumer budgets and corporate confidence.

Inflation is still part of the drag. Berlin expects consumer prices to average 2.7% this year and 3.0% in 2027, with the conflict in the Middle East feeding through especially via gasoline and diesel. That keeps the European Central Bank’s policy backdrop relevant for German assets, because sticky prices would limit how quickly borrowing costs can fall and how fast credit-sensitive sectors can recover.

The contrast between the government’s forecast and the mood inside the corporate sector is stark. The German Chamber of Industry and Commerce said the rebound has been “expensive,” relying on exports and state spending rather than broad private-sector momentum. Creditreform said investment appetite among midsize companies is at a 20-year low, while insolvencies remain elevated even if they are expected to ease by year-end. In other words, Germany may be growing again, but it is not yet convincing companies to commit capital.

For long-term investors, that split creates both caution and opportunity. The most obvious beneficiaries are companies tied to infrastructure, defense, industrial exports and public projects. The laggards are domestic consumer-facing businesses, small and midsize firms dependent on stronger private demand, and any borrower exposed to higher energy costs or still-tight financing conditions. Exchange-traded funds tracking Germany, such as EWG, reflect that ambivalence: the fund has rebounded off its lows, but still sits below its 50-day moving average, a sign the market is not yet pricing in a clean recovery.

The bigger narrative is that Germany is trying to trade fiscal stimulus for lost competitiveness. That can buy time and support earnings, but it does not replace the harder work of reform, investment and productivity growth. If Berlin follows through on supply-side changes, this could become more than a relief rally. If it doesn’t, the current pickup may remain exactly what the industry groups fear: a short-lived upswing built on government spending.

For investors, that means Germany is worth watching, not chasing. The country is showing resilience, and that is a meaningful change. But the best long-term gains will likely belong to businesses that can compound through a slower, more uneven recovery rather than those simply hoping for the macro picture to improve.