Bundesbank Forecasts Moderate German Economic Growth in Q1 2026, Stronger Rebound Expected from Spring

Subdued Start to 2026 for German Economy

Germany's central bank, the Bundesbank, forecasts a period of moderate, albeit subdued, economic growth for the first quarter of 2026. This outlook follows a modest expansion in the final quarter of 2025, where real Gross Domestic Product (GDP) saw a 0.3% increase quarter-on-quarter, resuming an upward trend that began in late 2024.

According to the Bundesbank's monthly report, the economy is expected to continue its recovery in the first quarter, though with 'weak momentum'. While industrial activity and exports are projected to increase, indicators suggest that private consumption may not sustain its previously elevated level. Additionally, construction activity could be impacted by poor weather conditions during the quarter.

Late 2025 Performance and Contributing Factors

The economic uptick in the fourth quarter of 2025 was primarily fueled by private and government consumption. This marked a shift after the German economy had largely stagnated over the preceding three years. The Bundesbank noted that the upward movement in economic activity had been temporarily interrupted in the third quarter of 2025, mainly due to the negative impact of US trade policy.

Anticipated Acceleration from Q2 2026

The Bundesbank anticipates a more dynamic growth trajectory for the German economy starting from the spring, specifically the second quarter of 2026. This acceleration is expected to be driven by several key factors:

• Fiscal Stimulus: Increased government spending on defense and infrastructure is poised to significantly bolster economic activity.
• Export Resurgence: German exports are expected to return to an expansion path, contributing to GDP growth.
• Investment and Wages: Increased public investment, rising wages, and a gradual improvement in the labor market are also projected to underpin real income and consumption.

Bundesbank President Joachim Nagel stated that 'the German economy will make headway again in 2026: while progress will be subdued initially, it will then slowly pick up.' He added that 'starting in the second quarter of 2026, economic growth will strengthen markedly, driven mainly by government spending and a resurgence in exports.'

Broader Economic Outlook and Challenges

For the entirety of 2026, the Bundesbank projects a calendar-adjusted real GDP growth of 0.6%. This figure represents a slight downward revision from an earlier forecast of 0.7%. Inflation, as measured by the Harmonised Index of Consumer Prices (HICP), is forecast to be 2.2% in 2026. The central bank noted that inflation is declining more slowly than previously expected, largely due to continued high wage growth and smaller reductions in energy prices.

The labor market remained largely unchanged in the final quarter of 2025, with employment falling slightly by 25,000 and the unemployment rate holding steady at 6.3%. Leading indicators do not suggest a short-term improvement in the labor market. Business sentiment in Germany has remained largely unchanged since the beginning of 2026, despite some improvements in the manufacturing sector, while sentiment in the services sector has weakened.