2025 and 2026 budgets underscore the government’s infrastructure and defence ambitions. Recent data on construction and investment signal tentative benefits from fiscal stimulus. Trade pressures create short-term headwinds; red tape, skills shortages could undermine fiscal stimulus. Demographics, trade competitiveness and likely fiscal shortfall from 2027 are medium-term obstacles, Standard Chartered's economists Christopher Graham and Saabir Salad report.

Still early days

"Having finally passed the 2025 budget, Germany’s coalition government has swiftly presented the 2026 budget to parliament. In both years, the scale of ambition on infrastructure investment and defence spending is clear. Efforts to increase private-sector investment via tax and energy policy changes have also been outlined. Recent data implies tentative improvements in investment and construction activity, potentially a signal that fiscal stimulus is having the desired effect."

"We remain optimistic over the medium term that German fiscal stimulus will have a material impact on economic growth, with positive spillover effects for the rest of Europe. Economic incentives are clear given Germany’s fiscal space and lack of growth in recent years; political incentives stem from the threat from the far-right in next year’s regional elections."

"We still think investment may fall short of the government’s targets and the impact on growth will take time. In the near term, trade pressures created by US tariffs are likely to offset much the early impact from fiscal easing. Medium-term, it will take time for the government to address bureaucratic constraints and skills shortages, while structural headwinds such as demographics and greater competition from abroad will limit Germany’s overall growth potential. Risks to the plans arise from difficulties dispersing funds quickly, the potential for investment spending to be siphoned off into other areas, and the need for fiscal restraint from 2027 onwards given projected shortfalls."