Economic Buzz: German central bank cautious about economic recovery

Bundesbank, the German central bank has noted that the German economic recovery, which had just begun in the winter half-year, will initially be slowed by the war in the Middle East. The sharp rise in energy prices will dampen households’ purchasing power and consumption expenditure. It will also weigh on firms’ costs. In addition, firms will also face increased supply bottlenecks and, in many cases, weaker demand. Elevated uncertainty and higher interest rates will be a drag on private investment.

Expansionary fiscal policy will be the only thing preventing a decline in gross domestic product (GDP) in the summer half-year. It will provide a strong boost to growth through to the end of the forecast horizon: the cumulative contribution to GDP growth up to 2028 is estimated to be around 1.3 percentage points. Rising defence expenditure will be particularly important here.

After the weak summer half-year, economic activity will gradually gain momentum. It will be supported not only by continued fiscal expansion but also by falling energy prices and an improving global economy. Calendar-adjusted real GDP will rise by 0.5 % in 2026, 0.8 % in 2027 and 1.4 % in 2028. As this year and next will have more working days, unadjusted GDP rates will then be somewhat higher (2026: 0.7 %, 2027: 0.9 %), but a little lower (1.2 %) in 2028.

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