Germany's economy fails to impress despite investment promises, fiscal changes

Germany still can’t get it ￰0￱ massive investment promises and big fiscal changes that got European policymakers buzzing, nothing’s taken ￰1￱ country’s economy is still stalling, and hopes that Germany could pull the euro zone out of its slump are quickly ￰2￱ to CNBC, the grand plans announced earlier this year are now under scrutiny, with economists asking what went wrong… and if anything will change ￰3￱ buzz started when Berlin moved to relax its strict debt ￰4￱ rule had capped how much debt the federal government could take on each ￰5￱ the new setup, Germany allowed itself more wiggle room, especially for defense and security ￰6￱ top of that, the government launched a €500 billion ($592 billion) fund aimed at infrastructure and climate ￰7￱ sounded ￰8￱ the results on the ground are still ￰9￱ promises not translating into actual growth Germany’s gross domestic product rose by just 0.3% in the first quarter of ￰10￱ it shrank by 0.3% in the second.

That’s after full-year contractions in both 2023 and ￰11￱ euro zone didn’t fare much better—GDP across the bloc went from 0.6% growth in Q1 to 0.1% in Q2. It’s sluggish across the ￰12￱ Germany was supposed to lead the recovery. That’s not ￰13￱ Central Bank Governing Council member Martins Kazaks told CNBC earlier this month that “the big hope lies on Germany” when it comes to fiscal spending boosting the region’s growth next ￰14￱ optimism isn’t backed by ￰15￱ hasn’t ￰16￱ Schmieding, chief economist at Berenberg, said a “major rise” in defense orders and infrastructure activity had technically ￰17￱ in his words, “we are not seeing it strongly in actual output data yet.” Holger added that everything was going about as expected after the debt brake rule change, but warned that public spending is rolling out slower than many expected.

“In Germany, it takes time to spend money,” he ￰18￱ some of the investment is tied up in long-term projects, other spending choices are now drawing more ￰19￱ Palmas, senior Europe economist at Capital Economics, flagged that Berlin isn’t just boosting defense and infrastructure, it’s also spending in other areas. “The government is not just raising defence and infrastructure spending,” Franziska said , “it is also using some of the additional fiscal space to finance other spending.” Extra deficit, small results, and regional drag Franziska pointed out that part of this includes electricity tax cuts for ￰20￱ could help a ￰21￱ most of the rest—like pension top-ups, healthcare, and social benefits—is going toward covering rising costs.

“The additional spending on healthcare and pensions won’t boost the economy,” she said, “given it reflects mainly rising costs due to demographics.” There’s no real sign that all this spending will lead to a meaningful recovery anytime ￰22￱ economic institutes have already downgraded growth expectations to just above 1% for ￰23￱ ECB expects the euro zone as a whole to grow by 1% that ￰24￱ doesn’t see much impact beyond ￰25￱ calculated that Germany’s stimulus might boost its own GDP by 0.3 percentage ￰26￱ could translate into a 0.1% boost for the wider euro zone. Franziska’s forecast was even lower: she expects Germany to contribute only 0.2% to euro zone growth in 2026.

Meanwhile, other players in the bloc are pulling in different ￰27￱ said that Spain’s economy is growing faster, helped by immigration and more ￰28￱ rate cuts could also help nudge some growth across ￰29￱ other forces are holding things ￰30￱ warned that recent ￰31￱ could drag euro zone GDP down by 0.2%, and France’s own budget cuts could hurt growth, ￰32￱ said Germany’s eventual recovery could still lift others a ￰33￱ expects a “modest positive confidence effect” from Germany’s shift “from its mini-recession until mid-2024 to significant growth from late 2025 onwards.” That could matter to its neighbors, especially because Germany is usually their most important trade partner.

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