DIW sharply lifts German growth outlook on export strength

Germany's economy is set to expand faster than previously anticipated this year, according to a major revision from the German Institute for Economic Research (DIW Berlin). The think tank now projects growth of 1.2% in 2026, more than double its earlier estimate of 0.5%, citing better-than-expected export performance and a milder energy price shock from the Iran conflict.

Looking further ahead, DIW expects the economy to grow by 1.0% in 2027 and 0.7% in 2028. However, the institute cautioned that the recovery remains on unsteady footing. High gas prices, weak household consumption, and persistent structural issues in industry are likely to dampen momentum in the second half of the year.

Economic output is expected to stall in the third quarter, with low water levels on key waterways and elevated energy costs weighing on energy-intensive sectors such as chemicals and metals.

Public consumption and investment are projected to drive around 70% of this year's growth, supported by spending on infrastructure, climate initiatives, and defence. "The German economy could be at a turning point towards stronger growth over the next two years," said DIW President Marcel Fratzscher. "At present, however, economic momentum is mainly due to the public sector."

Geraldine Dany-Knedlik, head of economic forecasting at DIW, noted that while the economy is recovering somewhat better than expected, it is "still standing on rather shaky ground."