Germany’s fiscal policy is boosting the economy
Policy steps taken last year set up the more expansionary government spending that is expected to help the economy this year. These include the amendment of the debt brake rule last March to allow for higher defense spending and infrastructure investment.
Germany’s fiscal deficit is expected to widen to 3.7% this year and 3.9% in 2027, according to the report. “For Germany, these would be the highest deficits outside of a recession in decades,” Garnadt writes.
Concern that the government might falter in the speed or execution of its plans to boost spending has receded. Compared with the initial announcements last year, the fiscal expansion is now more focused on subsidies, social spending, and tax reductions, as opposed to public investment. Rising defense spending—which Goldman Sachs Research expects to reach 3.3% of GDP by 2029—should support growth throughout the period the team’s outlook covers.
“Public spending had already picked up over the course of 2025, and we expect it to accelerate further this year,” Garnadt writes. This means fiscal policy turns expansionary after four years of fiscal drag. The outlook sees a fiscal boost of 0.5 percentage point in both 2026 and 2027.
Fiscal policy also drives the outlook for German assets. Goldman Sachs rates strategists expect yields on 10-year German bunds to increase to 3.25% by the end of 2026 (from 2.8% on January 15) as the deficit widens. Goldman Sachs Research’s equity strategists are positive on a range of stocks that should benefit from the fiscal rollout, including equities exposed to domestic consumption and defense companies.
What is the outlook for German manufacturing?
The underperformance of the German economy has been driven by a decline in manufacturing in recent years. The sector’s economic value added peaked in 2017 and has declined 7% since then, while overall industrial production and sales have fallen by almost 15% from their peak. More recently, though, manufacturing appears to have stabilized.