Germany’s Fiscal Expansion Expected To Lift Growth Above Forecasts, Says Goldman Sachs

Germany’s plan to significantly increase spending on infrastructure and defence is set to push economic growth above its long-run potential and above current market expectations over the next several years, according to a new outlook from Goldman Sachs Research.

The government led by Chancellor Friedrich Merz has announced €500 billion in infrastructure investment over 12 years and created fiscal room for higher military spending by adjusting the country’s constitutional debt rules. Goldman economists now expect German GDP growth to rise from 0.3% in 2025 to 1.4% in 2026 and 1.8% in 2027, well above the estimated 0.8% potential growth rate and the consensus view among economists.

“We have turned notably more optimistic on Germany’s economic outlook,” Goldman Sachs economists Niklas Garnadt and Jari Stehn said.

Under the plan, defence spending is projected to increase from 2% of GDP in 2024 to 3.5% by 2029, while overall public expenditure is expected to rise by 2.2% of GDP by 2027. The near-term priority will be execution, with the government expected to streamline permitting and planning to accelerate major public projects.

The expansion could also create political momentum for structural reforms, similar to the early-2000s labour market measures that boosted long-term competitiveness. Goldman Sachs notes, however, that Germany’s economy still faces persistent challenges, including heavy reliance on global trade, underinvestment in technology sectors, elevated energy prices, administrative red tape and skilled labour shortages.

To raise long-term growth sustainably, the report recommends targeted immigration programmes to address labour gaps, regulatory simplification to encourage investment, reforms to electricity pricing to mitigate high energy costs and diversification to reduce export dependence. Further proposals include stronger incentives to remain in the workforce longer and digitalization efforts to improve public service efficiency.

“Germany has a window of opportunity to build on an improved macro environment with reforms that deliver a lasting upgrade in economic performance,” the economists said.