Germany’s 2026 Growth Outlook Strengthens on Fiscal Spending

Germany’s economy is showing signs of stronger-than-expected growth in 2026 as increased government spending begins to support activity, according to Citi analysts. The fiscal boost is currently most visible in defence spending and government consumption, while major infrastructure investments are taking longer to affect the broader economy.

Defence expenditure from Germany’s core federal budget increased 27% in the 12 months through August compared with the previous 12-month period. Meanwhile, issuance from the country’s special defence and investment fund reached €36.5 billion between January and August, representing about 62% of the amount planned for 2026.

However, fund issuance does not immediately translate into economic activity. Citi noted that consumption-related measures have moved through the economy more quickly. One example is the €6 billion earmarked this year for hospital transformation costs, much of which has effectively been transferred to another fund.

Infrastructure spending has progressed more slowly. Many projects remain in their early stages, while German Finance Ministry monitoring data indicate delays across several initiatives. As a result, the full economic impact of Germany’s infrastructure investment programme may not become evident for several quarters.

Manufacturing data offer clearer evidence that fiscal stimulus is beginning to gain traction. German factory orders started improving roughly a year ago following the passage of the 2025 budget in September. Domestic orders for weapons and ammunition have been particularly strong, providing a clearer connection to government defence procurement. Germany’s domestic manufacturing order backlog has also risen sharply since the budget was approved.

Still, government spending is not the only factor supporting demand. Orders for durable consumer products, including information technology, communications equipment and electronics, have increased among both German and overseas buyers.

Infrastructure indicators remain mixed. Civil engineering orders excluding roads rose 9.3% on a three-month-on-three-month basis, but volatility makes it difficult to establish a sustained acceleration.

Overall, Germany’s fiscal stimulus is moving through the economy unevenly, with defence procurement and government consumption leading while infrastructure investment could provide a larger growth boost in coming quarters.