 German Economy Grows, but Not on Its Own Strength - Global Economy Stays on CourseGeraldine Dany-Knedlik, Nina Maria Brehl, Angelina Hackmann, Pia Hüttl, Konstantin A. Kholodilin, Laura Pagenhardt, Jan-Christopher Scherer, Teresa Schildmann, Hannah Magdalena Seidl, Ruben Staffa, Kristin Trautmann and Jana Wittich DIW Weekly Report, 2026, vol. 16, issue 36/37/38, 273-292 Abstract: The German economy has proved more resilient this year than expected in early summer. The energy price shock from the Iran war has been milder than assumed. Despite the unprecedented supply outage in the Gulf region, oil prices rose only moderately, as supply was expanded elsewhere at the same time. Natural gas is a different story: prices there are now expected to be higher than assumed in the summer, and low storage levels are likely to make themselves felt in early 2027. A vigorous recovery therefore rests on shaky ground. Gross domestic product expanded by 0.3 percent in the second quarter, driven largely by foreign trade. Exports rose unexpectedly strongly, by 2.0 percent, above all chemical and mineral oil products - most likely a pull-forward effect prompted by the uncertainty on energy markets. Domestic demand, by contrast, stayed subdued. Private consumption rose by just 0.1 percent, investment in machinery and equipment fell by 1.4 percent, and employment continued to decline. In the third quarter, economic output is likely to be roughly flat: low water levels on important rivers are hampering transport and production in the energy-intensive sectors, and high energy prices are dampening activity further. Thanks to expansionary fiscal policy, price-adjusted gross domestic product should grow by 1.2 percent this year, and by 1.0 and 0.7 percent in the two years after that. DIW Berlin is thus raising its expectation for the current year by more than 0.5 percentage points against the summer forecast, almost entirely on the back of those unexpectedly strong second-quarter exports. Exports are unlikely to keep up that pace, though, as structural weaknesses such as declining competitiveness in key markets like China are still there. The robust global economy should at least support demand from abroad. DIW Berlin expects global output to grow by 3.2 percent both this year and next, and by 3.4 percent in 2028. Higher energy prices are weighing on activity in many places, but the investment boom in artificial intelligence and rising military spending are propping up demand at the same time—and as a producer of intermediate goods, the German economy stands to benefit from precisely that. All in all, the recovery now under way remains a matter for the public sector, while Germany’s private sector is picking up only sluggishly. Consumer price inflation, at 2.7 percent this year and 2.6 percent next, is still well above the European Central Bank’s target. The central downside risk has meanwhile shifted from the oil market to the gas market: at the end of August, German gas storage facilities were only around 52 percent full. A cold winter or a renewed geopolitical escalation would keep inflation elevated for longer and dampen private demand. Keywords: Business cycle forecast; economic outlook (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:diw:diwdwr:dwr16-36-1 Access Statistics for this article DIW Weekly Report is currently edited by Anna Bindler, Tomaso Duso, Sabine Fiedler, Marcel Fratzscher, Peter Haan, Claudia Kemfert, Alexander Kritikos, Alexander Kriwoluzky, Karsten Neuhoff and Sabine Zinn More articles in DIW Weekly Report from DIW Berlin, German Institute for Economic Research Contact information at EDIRC. |
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