Germany has significantly raised its economic growth forecast, but stalled structural reforms and geopolitical uncertainty still pose long-term risks.

The German Economy Ministry released its autumn forecast on Thursday, raising its 2026 gross domestic product (GDP) growth projection from 0.5% to 1.3%, the fastest pace since 2017; the 2027 growth forecast was also raised from 0.9% to 1.1%. Strong exports in the first half of the year and a substantial increase in government spending jointly drove this upward revision, bringing Germany's economic growth expectations back to pre-Middle East conflict levels.

The Economy Ministry stated that the German economy "is on a growth trajectory, demonstrating resilience beyond expectations," with manufacturing performing particularly well under the impact of the Middle East conflict. Global supply constraints prompted companies to stockpile energy-intensive German-made goods in advance, providing an unexpected boost to the economy. However, the Economy Ministry expects growth to fall back to 0.6% in 2028, with persistent geopolitical turmoil and elevated energy prices remaining the main downside risks.

For the market, this upward revision sends a positive signal that Europe's largest economy is stabilizing, but Germany's economy has barely grown over the past three years and structural reform progress has been slow, meaning this recovery still faces considerable uncertainty.

Manufacturing stabilizes, exports and fiscal spending become main drivers

The Economy Ministry primarily attributed this growth momentum to foreign trade and government spending. Data shows that despite low Rhine water levels, industrial output still grew 2% month-on-month in August, and order volumes continued to recover as Germany's rearmament program advanced.

The Economy Ministry pointed out that companies front-loading inventories due to global supply constraints drove export performance beyond expectations; meanwhile, the government expanded infrastructure and defense spending through debt financing, which is expected to continue supporting economic growth in the coming years.

But domestic demand remains weak. The Economy Ministry expects rising prices to continue weighing on private consumption, and private investment can only recover slowly. This means current growth relies heavily on external demand and fiscal stimulus, and the economy's own endogenous growth momentum remains insufficient.

Reform progress is slow, political pressure constrains recovery space

Despite improving economic data, Federal Chancellor Friedrich Merz's policy space remains limited. After losing three consecutive state parliament elections last month, the far-right Alternative for Germany (AfD) saw a significant rise in support, further increasing political pressure on the governing coalition.

On economic policy, several reforms previously pushed by the Merz government have also stalled. The governing coalition parties met in Berlin on Wednesday evening and reached consensus on advancing a package of reform measures, but the overall reform process remains slow.

Helena Melnikov, executive director of the German Chamber of Commerce and Industry (DIHK), said: "This economic rebound is costly, and without substantive economic reforms, the recovery will be difficult to sustain." Complaints from the business community about taxes, regulation, labor costs, and lengthy approval procedures remain widespread.

Geopolitics remains the biggest variable

The Economy Ministry explicitly listed geopolitical conflicts as the core risk to the economic outlook, emphasizing that "the economic outlook depends to a large extent on the trajectory of the Middle East conflict and the Russia-Ukraine conflict."

In April this year, hit by the Middle East conflict and energy supply disruptions, the German government had downgraded its 2026 economic growth forecast from 1% to 0.5%. This sharp upward revision means growth expectations have returned to pre-conflict levels, but the Economy Ministry also warned that if commodity and energy prices remain elevated, it will push up corporate costs and weaken household consumption capacity; conversely, if geopolitical conflicts continue to ease, the economic recovery is expected to accelerate further.

This revised forecast will serve as the basis for Germany's tax estimates and is broadly consistent with forecasts released by Germany's major economic research institutes last month.