Will the German fiscal package fizzle out?

So far, economists are expecting strong growth for 2026, ...

At the beginning of March, the future coalition partners, the CDU/CSU and SPD, agreed to exempt defense spending of more than 1% of GDP from the restrictions of the constitutional debt brake and to set up a extra-budgetary fund of €500 billion, primarily for investments in infrastructure. CDU leader Merz alluded to Mario Draghi's “whatever it takes” statement. As a result, most economists revised their growth forecasts for 2026 upward. They now expect a growth rate of 1.2% for the coming year.

... but question marks have recently appeared

But question marks have recently appeared. During the summer, it became increasingly clear how different the CDU/CSU and SPD's ideas on economic policy are. The SPD brought tax increases into the discussion, even though the coalition agreement rules these out and provides for gradually lower corporate taxes from 2028 onwards. There is little sign of the promised "autumn of reforms", meaning that massive additional government spending is unlikely to be accompanied by higher trend growth.

In addition, key economic data has recently been disappointing. After several consecutive increases, the Ifo business climate index fell unexpectedly in September. Furthermore, order intake, adjusted for big ticket orders, slumped by more than 3% in August, meaning that at best it can be described as moving sideways at a low level. The massive decline in industrial production also caused a stir, even though this was partly due to an unusually high number of factory holidays in the automotive industry in August.

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