"Spending growth creates basis for recovery" - IMF, "optimistic" about Germany's economic outlook
Germany's reform of fiscal rules earlier this year has laid the groundwork for economic recovery, but medium-term prospects remain limited, the International Monetary Fund said in a report.
Germany was the only member of the G7 advanced economies to fail to expand its economy for the past two years, and is expected to register only a modest 0.2% growth this year, according to IMF forecasts.
The new German government's plans to significantly increase spending on infrastructure and defense are expected to boost growth, driven by a gradual acceleration in investment and domestic consumption. The IMF forecasts real GDP growth of around 1.0% in 2026 and 1.5% in 2027.
The deficit is projected to widen to about 4% of GDP by 2027 and debt will rise to about 68% of GDP, still the lowest among G7 economies.
However, medium-term prospects remain limited by rapid population aging and weak productivity growth.
Economists stressed that the current fiscal space should be used carefully to expand the long-term productive capacity of the economy and should be accompanied by structural reforms. These could include measures to stimulate innovation, digitalization and reduce bureaucracy. Part of the reforms is also to ease labor supply constraints and deepen European economic integration.
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