Outlook 2026 – Fiscal and monetary policy to the rescue

Our central theme for 2026

Every year in November, we consider what the central theme ("leitmotif") for the major economies in the coming year might be. In 2026, finance ministers and central bankers are likely to take center stage. In view of the ongoing major problems surrounding trade conflicts, high government debt, and reform backlogs, they are likely to try to boost their economies with expansionary fiscal and/or monetary policies. However, it is not clear whether growth will actually pick up in the end. But finance ministers and central bankers will try – and that, too, will have an impact on the financial markets.

Germany: A considerable fiscal stimulus and ...

The leitmotif of a stimulating fiscal and monetary policy is a perfect fit for Germany. It is also likely to succeed in this country in the sense that growth in 2026 should be significantly higher at 1.2% than in 2025 (0.1%).

This is primarily due to the German government's fiscal package, which includes a special infrastructure fund of €500 billion and exempts defense spending of more than 1% of GDP from the debt brake. Because the government shifted spending on a large scale from the core budget to the shadow budget (“special fund”), considerable financial leeway was created in the core budget. The government is taking advantage of this. For example, there will be special depreciation allowances for companies, inflation-related increases in taxes will be partially offset, VAT for restaurants and grid fees will be reduced, and so on. The relief corresponds to a quarter of a percent of GDP.

A significantly greater boost is likely to come from the special fund for infrastructure and from defense spending. Admittedly, spending will not rise nearly as sharply as envisaged in the budget because procurement for the German Armed Forces is slow and the construction of infrastructure is hampered by lengthy approval procedures. However, based on conservative estimates by German economic research institutes, defense spending and infrastructure investment are still likely to increase by an amount equivalent to 0.6 percent of GDP in 2026.

If we combine the higher spending on defense and infrastructure with the additional expenditure caused by legislative changes, this results in a considerable fiscal stimulus of around 0.8% of GDP for the coming year, whereas fiscal policy actually slowed the economy slightly in 2025.

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