Germany's fiscal expansion would boost GDP from 2026, DIW says
German chancellor-in-waiting Friedrich Merz was set to make a last-ditch attempt on Friday to convince the Greens of his plans for a massive increase in state borrowing to bolster defence and infrastructure.
DIW, one of Germany's main economic forecasters, cut its forecasts for Europe's largest economy on Friday for this year and next due to political uncertainty and global trade tensions.
Next year, gross domestic product will likely increase by 1.1%, down from the DIW's December forecast of 1.2%, the institute said. This forecast does not take into account defence and infrastructure expenditures.
If a defence and infrastructure spending ramp-up is included, growth of 2.1% is expected in 2026, DIW said.
The institute expects the economy to stagnate this year, revising its previous forecast for 0.2% growth. This is because the fiscal expansion would not have any impact in the current year.
One reason for the downward revision is private consumption, which is developing more weakly than expected in Germany despite rising real wages, DIW said.
Many people in Germany are holding back on major purchases due to the tense global political situation and job security concerns, it added.
The IfW institute revised up its 2026 estimate for Germany, predicting 1.5% growth off the back of the expected boom in public spending. Like the DIW, it also expects a stagnation this year.
In 2024, Germany became the only G7 country to post a contraction for two consecutive years.
Strengthening public investment and reducing economic uncertainty should be a top priority for the new German government, said DIW president Marcel Fratzscher on Friday in the presentation of the new forecasts.
"Although special funds are not the ideal solution, they could offer a pragmatic approach to compensate for Germany's investment weakness and pull the German economy out of the crisis," Fratzscher said.
Merz has justified the need to push the constitutional amendments through the outgoing parliament with the recent shift in policy in the United States under President Donald Trump, warning that a hostile Russia and an unreliable U.S. could leave the continent exposed.
"The loss of the U.S. as a reliable political partner poses major challenges for the future German government and exacerbates the already difficult situation, especially for export-oriented companies," said Dany-Knedlik.
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Dubai Eye
13 hours ago
- Dubai Eye
Zelenskyy heads to Berlin for online meeting with Trump, European leaders
Ukrainian President Volodymyr Zelenskyy travelled to Berlin on Wednesday for a German-hosted virtual meeting with Donald Trump and European leaders, two days before the US president meets Russia's Vladimir Putin in Alaska. Europe's leaders are trying to drive home the perils of selling out Kyiv's interests at the first US-Russia summit since 2021. Trump has said the Alaska talks will be a "feel-out" meeting as he pursues a ceasefire in Moscow's war on Ukraine, having said last week, to consternation in Kyiv and Europe, that any deal would involve "some swapping of territories". Zelenskyy will meet German Chancellor Friedrich Merz before a video conference with the leaders of Germany, Finland, France, Britain, Italy, Poland and the European Union at 2 pm (1200 GMT), the hosts said. NATO Secretary General Mark Rutte will also attend. Trump and Vice President JD Vance will join the call at 3 pm (1300 GMT). EUROPE AND KYIV FEAR UNPREDICTABLE ALASKA DEAL The unpredictability of the summit in Alaska has fuelled Europeans' fears that the US and Russia could take far-reaching decisions over their heads and even seek to coerce Ukraine into an unfavourable deal. "We are focusing now to ensure that it does not happen - engaging with US partners and staying coordinated and united on the European side. Still a lot of time until Friday," said one senior official from Eastern Europe. European leaders, wary of angering Trump, have repeatedly said they welcome his efforts while stressing that there should be no deal about Ukraine - almost a fifth of which Russia has occupied - without Ukraine's participation. Trump's administration tempered expectations on Tuesday for major progress toward a ceasefire, calling his meeting with Putin in Alaska a "listening exercise". Trump's agreement last week to the summit with Putin was an abrupt shift after weeks of voicing frustration with Putin for resisting the US peace initiative. Trump said his envoy had made "great progress" at talks in Moscow. Half a dozen senior European officials told Reuters that they see a risk of a deal being struck that is unfavourable for Europe and Ukraine's security. They said European unity would be vital if that happened. White House press secretary Karoline Leavitt told reporters on Tuesday the summit would be a "listening exercise" for Trump to hear what it would take to get to a deal. After the meeting with Trump, the "coalition of the willing", a group of countries working on plans to support Ukraine in the event of a ceasefire, will also convene online. BATTLEFIELD PRESSURE MOUNTS ON UKRAINE A Gallup poll released last week found that 69 per cent of Ukrainians favour a negotiated end to the war as soon as possible. But polls also indicate Ukrainians do not want peace at any cost if that means crushing concessions. Ahead of the calls, Zelenskyy said it would be impossible for Kyiv to agree to a deal that would require it to withdraw its troops from the eastern Donbas region, a large swathe of which is already occupied by Russia. That, he told reporters on Tuesday, would deprive Ukraine of a vast defensive network in the region, easing the way for a Russian push deeper into Ukraine in the future. He said territorial issues could only be discussed once a ceasefire was in place and Ukraine had received security guarantees. Moscow's troops have recently ramped up pressure on the battlefield, tightening their stranglehold on the cities of Pokrovsk and Kostyantynivka in eastern Ukraine.
Middle East Eye
20 hours ago
- Middle East Eye
German manufacturer mulls relocating to US to avoid arms embargo against Israel
German automotive manufacturer Renk, which produces tank transmissions and engines for the Israeli military, is considering moving production to the US after the German arms embargo on Israel. Renk CEO Alexander Sagel mentioned the prospective shift on a post-earnings call, as reported by Reuters on Wednesday. The call comes five days after German Chancellor Friedrich Merz announced the country would freeze military exports to Israel that could be used in the Gaza Strip, amidst an Israeli plan to occupy the entire Palestinian enclave. Israel's war on Gaza has drawn international condemnation, and its plan to empty Gaza City of its one million inhabitants has drawn criticism even from staunch Israeli allies such as Germany. If enforced, the plan would amount to the forced expulsion of Palestinians, an illegal move under international law. Renk produces tank transmissions and engines for the Israeli military, accounting for two to three percent of the company's business portfolio. New MEE newsletter: Jerusalem Dispatch Sign up to get the latest insights and analysis on Israel-Palestine, alongside Turkey Unpacked and other MEE newsletters These parts are essential components in Israel's main Merkava battle tanks, which were used in the killing of six-year-old Hind Rajab and her family, as well as Namer armoured personnel carriers. 'If we cannot produce [transmissions] in Germany, we will relocate these volumes to a different plant, for example, to the US,' Segal said. 'This might take maybe 8 to 10 months, but if there's no move forward, we will do it because we have this business.' Renk has seen rising profits from its vehicle mobility solutions department in recent months, as Israel's genocide in Gaza continues. German embargo Chancellor Friedrich Merz said on Friday that the exports were frozen 'until further notice' and expressed concern for the plight of Gaza's Palestinians, who are suffering under Israeli-imposed starvation. Germany is Israel's second-largest supplier of weapons, following the US. Merz said it was Israel's right to disarm Hamas and seek the release of its captives in Gaza, but that these goals have become harder to achieve due to Israel's planned military action. "The German government believes that the even tougher military action in the Gaza Strip decided upon by the Israeli cabinet last night makes it increasingly difficult to see how these goals can be achieved," Merz said in a statement. Politically, Germany is one of Israel's closest allies. The country has not recognised Palestine and has committed to ignoring the International Criminal Court's arrest warrant against Israeli Prime Minister Benjamin Netanyahu. Norway sovereign wealth fund drops investments in 11 Israeli companies Read More » Germany has also cracked down on pro-Palestine speech by banning symbols associated with the movement, such as the inverted red triangle, and by withholding public funds from individuals and organisations that boycott Israel. After Israel's cabinet approved a plan to occupy the entire Gaza Strip, Germany announced it would halt 'any exports of military equipment that could be used in the Gaza Strip until further notice'. If enforced, a German arms embargo could represent a significant step in Israel's growing international isolation. Yet according to the Palestinian-led Boycott, Divest and Sanctions movement, on the same day Germany's arms embargo was announced, the country issued a licence to export a submarine to Israel. On 31 July, Slovenia became the first European Union country to impose an arms embargo on Israel. Citing the failure of the EU to impose restrictions itself, the central European country unilaterally banned the export or import of weapons to Israel.
Gulf Today
20 hours ago
- Gulf Today
German gas drive fuels fears of climate backsliding
Sam Reeves, Agence France-Presse Germany's conservative-led government has launched a drive to rapidly build more gas-fired power plants, fuelling fears about climate policy backsliding and sparking unease even within its own ranks. Chancellor Friedrich Merz's coalition has made reviving Europe's struggling top economy a priority and argues that reliable and affordable energy supplies are crucial for the country's manufacturing titans. But critics charge the bid to boost fossil fuel production is ideologically driven and highlights a shift away from green policies under the new government. Merz leads a coalition that includes his centre-right CDU party and junior partners the centre-left SPD — but without the Greens, who were in the last administration. The economy ministry, headed by Katherina Reiche of the CDU, is vocally backing a target of building new gas plants with about 20 gigawatts of power production capacity by 2030. Reiche, a former energy company executive, has argued it is important to "move very quickly" towards building the plants "in order to maintain a high level of security of supply in our country". The goal is to have a backup source of power in times there are shortfalls of renewables, which sometimes happens when the sun is not shining or there is not enough wind. Supporters say more supply is needed in the short term as nuclear power has been switched off in Germany and coal should follow suit in the coming years. They argue natural gas — which emits greenhouse gases but is less polluting than coal — can bridge the gap until enough renewables come online. Under German climate law, the share of renewable electricity consumed in the country should rise to 80 percent by 2030. It stood at around 55 percent in 2024, according to the federal environment agency. Earlier this month, the government agreed gas production could begin off a North Sea island in an area straddling the border with the Netherlands, with a Dutch company planning to extract the fossil fuel, sparking condemnation from environmentalists. Plans to build more gas plants are not new, and the previous government also wanted to expand capacity, but the new targets are around double those of the past. Underlining the new government's changing priorities, Reiche's ministry has been renamed the "Ministry for Economic Affairs and Energy" — under the Greens in the previous, SPD-led coalition, it was called the "Ministry for Economic Affairs and Climate Action". She also appeared at one point to question Germany's legally binding target of achieving greenhouse gas neutrality by 2045, sparking tensions with SPD environment minister Carsten Schneider. An economy ministry spokesman told AFP that Reiche "stands by" the current climate goal. "The government is committed to achieving these targets with the political measures at its disposal — while maintaining Germany's position as an industrial location," he said. The Greens have regularly attacked Reiche while more than 380,000 people have so far signed a petition by campaign group Campact warning her policies risk "a dramatic setback in climate policy". But criticism is emerging even within the conservatives. The Climate Union, grouping CDU and other conservative politicians, has warned subsidies for new gas plants could push up power costs, the Handelsblatt financial daily reported. Energy think tank Agora Energiewende estimates that only a maximum of 10 gigawatts of extra gas plants would be needed by 2030 to supplement other power sources. "This will ensure security of supply — even if coal-fired power plants are taken off the grid as planned," Philipp Godron, the head of the group's power programme, told AFP. Meanwhile, questions remain over how quickly the plants can be built, while the European Commission, the EU's executive arm, still needs to give its approval. The economy ministry spokesman told AFP that talks with the EU for putting out tenders for a "significant portion" of the plants were "well-advanced". He also stressed that any new gas-fired plants must be "decarbonised in the long term", for example by switching them to green hydrogen, which was necessary "in view of the decarbonisation of the electricity system and compliance with EU law".
