Germany’s economy may grow by as much as 1% as economic momentum improves in the second half of 2026, Bundesbank President Joachim Nagel said, offering a more optimistic assessment for Europe’s largest economy after years of weak performance. His comments suggest Germany could be moving beyond its prolonged period of stagnation, although structural challenges and geopolitical uncertainty remain significant risks.
Nagel said Germany’s recent economic performance had been encouraging, with the economy expanding 0.3% in the second quarter. He indicated that the positive momentum could continue through the remainder of the year, supporting stronger annual growth than previously expected. The comments came as German officials gathered at a G20 meeting in the United States, where global trade tensions and geopolitical risks were major topics of discussion.
The German economy has struggled in recent years, with weak industrial production, high energy costs and subdued external demand weighing heavily on growth. Germany’s manufacturing sector has been particularly exposed to changes in global trade, competition from China and the consequences of higher energy prices following Russia’s invasion of Ukraine.
The latest improvement therefore represents an important change in direction. Germany’s second-quarter expansion suggests that domestic activity and investment may be beginning to recover. Government spending on infrastructure and defense is also expected to provide additional support, potentially giving businesses greater confidence to invest after a prolonged period of uncertainty.
Nagel’s assessment is notably more positive than the Bundesbank’s official forecast. The central bank currently expects German economic output to expand by about 0.5% in 2026, followed by 0.8% growth in 2027 and 1.4% in 2028. A result closer to 1% this year would therefore represent an upside surprise compared with the institution’s baseline expectations.
Fiscal policy is becoming increasingly important to the outlook. Germany has moved toward greater public investment in infrastructure and defense, creating the possibility of stronger demand across construction, manufacturing and related industries. Economists have argued that such spending could help offset some of the weakness caused by Germany’s aging population, bureaucracy and declining competitiveness in traditional industrial sectors.
However, Nagel also warned that Germany cannot rely indefinitely on borrowing-funded investment. He stressed the importance of maintaining fiscal discipline to protect the country’s AAA credit rating. Germany still has relatively strong public finances compared with many other major economies, but debt is rising as Berlin increases spending on infrastructure and defense.
Inflation also appears less threatening than during the previous energy crisis. Nagel said euro-area core inflation has been declining and that there is no clear evidence of so-called second-round effects, in which higher prices trigger stronger wage demands and create a broader inflation cycle. That could give the European Central Bank greater flexibility as it assesses monetary policy.
For Germany, stronger growth would have implications beyond GDP. A recovery in industrial activity could improve corporate investment, employment and tax revenues while reducing pressure on government finances. It could also strengthen confidence among international investors who have increasingly questioned whether Germany remains an attractive location for manufacturing and clean-technology investment.
Still, the recovery faces considerable external risks. Trade disputes involving the United States, competition from China and geopolitical instability could weigh on exports and business confidence. German Finance Minister Lars Klingbeil recently described uncertainty as a major obstacle to economic growth, highlighting the continuing vulnerability of Germany’s export-oriented economy.
The next several quarters will therefore determine whether Nagel’s optimism develops into a sustained recovery. If domestic investment accelerates and industrial activity stabilizes, Germany could approach the upper end of current growth expectations. But without structural reforms, improved competitiveness and stronger private-sector investment, faster growth may prove temporary.
For now, Nagel’s comments provide a more hopeful outlook for an economy that has spent years struggling to regain momentum. A return toward 1% growth would not constitute a boom, but it would mark a meaningful improvement for Germany and could signal the beginning of a broader economic recovery.
