Germany’s Economic Recovery Expected to Gain Pace as Fiscal Easing and Monetary Loosening Take Effect
The International Monetary Fund (IMF) Executive Board has concluded its Article IV Consultation with Germany, highlighting a fragile recovery following several years of economic strain.
Germany’s economy has been weighed down by a series of significant shocks in recent years, compounded by persistently weak productivity growth. The surge in energy prices in mid-2022, alongside rapid monetary tightening to curb inflation, pushed the economy into contraction in both 2023 and 2024. While growth resumed toward the end of 2024 as these pressures eased, the recovery has remained subdued amid rising trade-related challenges.
According to the IMF, Germany’s weak growth performance also reflects long-standing structural constraints, including delayed reforms and intensifying competition in global export markets. The slowdown has begun to affect the labour market, with unemployment edging higher and part-time employment increasing. Inflationary pressures, however, have moderated, supported by lower energy costs and subdued domestic demand.
The Fund noted that Germany’s 2025 reform of its constitutional debt-brake rule is expected to support a gradual economic rebound. Planned fiscal expansion in 2026–27, together with the delayed impact of recent monetary easing, is projected to lift growth in the coming years. As domestic demand becomes the main driver of activity, Germany’s current account surplus is expected to narrow gradually, though it will remain in positive territory. Inflation is forecast to stay close to the European Central Bank’s 2 per cent target.
Despite higher public investment, the IMF cautioned that Germany faces a challenging medium-term growth outlook. Rapid population ageing is expected to weigh heavily on labour supply, with the working-age population projected to shrink faster than in any other G7 economy over the next five years. Productivity growth is also likely to remain modest unless further reforms are implemented at both the national and EU levels to enhance efficiency and support innovation.
In its assessment, IMF Executive Directors welcomed the nascent recovery and the improved outlook following a prolonged period of weak growth driven by external shocks and structural bottlenecks. They praised the authorities for reforming the debt brake to unlock additional public investment and address critical infrastructure needs.
Directors supported plans to deploy available fiscal space in the near term to stimulate economic activity and close the negative output gap, which could also facilitate external rebalancing. They recommended targeted measures, including increased high-quality public investment and reductions in high effective marginal income tax rates, to strengthen Germany’s long-term growth potential. Emphasis was placed on improving the efficiency and execution of public investment to maximise its economic impact.
Over the medium term, Directors underscored the need for fiscal consolidation to manage rising costs related to ageing and defence while stabilising public debt levels and preserving investment. They proposed growth-friendly measures such as sector-specific spending reviews, the removal of environmentally harmful subsidies, and further pension reforms aimed at extending working lives.
The IMF welcomed Germany’s Modernisation Agenda and urged swift implementation of additional structural reforms. Recommendations to expand labour supply included improving access to childcare, reducing tax disincentives for second earners and low-income workers, and strengthening labour market integration for immigrants. To boost productivity, Directors called for reforms that support start-ups and innovation, including revisiting tax policies that favour established firms, reducing bureaucratic burdens, expanding digital infrastructure, and enhancing skills and vocational training.
Directors also stressed that deeper integration within the EU Single Market would support stronger growth in Germany and across Europe, while urging the authorities to remain vigilant to risks linked to geo-economic fragmentation.
On the financial sector, the IMF assessed the system as broadly resilient, though it noted pockets of vulnerability that warrant close monitoring. Directors agreed that current macroprudential settings are appropriate but recommended expanding the policy toolkit through legislation to introduce additional borrower-based measures. Ongoing efforts to strengthen anti-money laundering and counter-terrorism financing frameworks were also welcomed.
