Germany

Fiscal spending supports 2026-27 growth

Germany is currently one of the slowest growing advanced economies with real GDP almost not having expanded at all since late 2019. The country’s export-orientated business model, relying heavily on the machinery, automotive and the chemicals industries have been under pressure for quite some time already. Unfortunately, higher energy prices, the introduction of US tariffs and China’s rise as a competitor on global markets are adding further strains on the domestic economy. After having contracted in 2023 and stagnated in 2024, growth finally returned in 2025, when real GDP expanded by a still anaemic 0.2%. Positively, another acceleration in 2026 is still likely, although the Middle East conflict and its effects on energy and chemical prices are creating some headwinds. For 2027, we assume that the German economy will switch into a higher gear. Unlike in previous recovery phases, this expansion will not be predominantly driven by the private sector as both household consumption and corporate investment should remain lacklustre while net exports continue to disappoint as well.

On the contrary, a debt-financed Special Fund for Infrastructure and Climate Neutrality (SFIC) was set up by the government in 2025 which will have a stimulating effect on government spending, particularly on public investment. The Fund’s sizable budget of 500 billion euros (around 11% of current GDP) will be spent over the next decade with 100 billion euros each being earmarked for the Bundesländer (the regions) and a climate and transformation fund. The remaining 300 billion euros will be allocated by the federal government. However, uptake has been behind schedule so far, thereby reducing the potential growth impact. The latest progress report based on June 2026 data paints a mixed picture. On the Länder level, 9.6% of the budget (equivalent to 9.6 billion euros) has been allocated to projects by mid-2026 but only 0.5% actually disbursed. On the federal level, performance is much better: in 2025, the government managed to spend 14.0 billion euros (equivalent to 74.0% of the allocated budget of 18.9 billion euros). In January to June 2026, 15.1 billion euros have been disbursed, around 38% of this year’s budget of 39.7 billion euros. However, there are sizable differences between projects. While hospital investment has absorbed 100% of its allocated budget in 2026 already (6 billion euros) and sporting venues have benefitted from the disbursement of around 60% of the 2026-allocation (500 million out of 836 million euros), the situation looks much worse in other areas. In energy infrastructure, R&D and digitalisation, cash outflow rates currently stand in the low double digit range. Meanwhile, traffic infrastructure, which will receive the lion's share of SFIC funding this year had absorbed around a third of its 22 billion euros budget by the end of June 2026. All in all, public investment in Germany is set to rise to around 129 billion euros this year, up from 75 billion euros in 2024. While construction and adjacent sectors will benefit from the increased spending on infrastructure and buildings, the arms industry will also continue to see higher demand in 2026-27. A special fund for re-armament (set up by the previous government after the Ukraine invasion in 2022, size: 100 billion euros) will be depleted by the end of 2027 but the current government has excluded military spending from the constitution-enshrined debt brake. As a result, the defence budget is forecast to reach 152 billion euros in 2029, triple the 2023-reading and equivalent to 3.5% of GDP (currently 2.4%). Given the immense capacity issues in the German arms industry, some of the additional orders will inevitably be placed with foreign suppliers and hence support sectoral growth abroad as well.

In total, Germany’s fiscal stimulus package should add 0.4 percentage points to growth in 2026 and 2027 each, but it will come at the cost of higher budget deficits and increased government debt. This happens at a time when the German 10-year government bond yield has already risen to 3.2%, the highest reading since 2011. As a result of fiscal deficits of around 4% of GDP in both 2026 and 2027, and a lacklustre economic growth, Germany’s public debt to GDP ratio is projected to increase from around 62% in 2024 to close to 68% at end-2027. This is still sound in a European comparison (the eurozone average stood at 89% in Q2 2026) but it signals a change from the country’s traditionally strict disciplined fiscal approach. It also creates medium-term risks should the SFIC budget be misappropriated for government handouts, rather than being used for public investment.

The private sector continues to underperform

Problematically, without the fiscal stimulus, Germany’s economy would be at risk of stagnating once more as both households and businesses are downbeat about the quarters ahead. The outbreak of the Iran war in March 2026 and the subsequent energy price increases have weighed on consumer confidence. GfK’s Consumer Climate has fallen to a three-year low of -33.1 points in May and only recovered marginally since then. Both economic and income expectations have fallen from very robust readings of +10.1 and +15.2 in July 2025 to -6.3 and -14.5, respectively one year later. The “willingness to buy” sub-index is also deep in negative territory. This, coupled with higher than previously anticipated inflation (leading to stagnating real wages) and heightened job insecurity will suppress household demand in the remainder of 2026 and the first quarters of 2027. Given the importance of private consumption (accounting for more than 53% of GDP in 2025), this does not bode well for growth prospects in the outlook period.

Meanwhile, on the corporate side, the Ifo Business Climate has returned to an upward trend, reporting three consecutive improvements in May to July. That said, the indicator remains in negative territory across all sectors surveyed and especially retailers are very pessimistic about the twelve months ahead. Worryingly, credit risk remains an issue: corporate insolvencies have been rising since 2022 with January-April 2026 showing another 7% y/y increase. Key policy rates in the euro zone have already been increased by the ECB with further hikes being possible, should the Iran war translate into more persistent price pressures. Equally problematic, the latest ECB Bank Lending Survey, published in July 2026, shows that companies’ access to credit has been tightened by commercial lenders for four consecutive quarters. Citing growing geopolitical and insolvency risks, banks also expect further tightening in the second half of 2026, thereby creating more refinancing challenges for German companies.

The country’s current account surplus is largely driven by its trade in goods. While exports to the euro area are still growing, shipments to China and the US (the two single most important export markets) have been shrinking for quite some time. Following contractions by around 10% in 2025, data for January-May 2026 is also bleak: exports to the US fell by 7.0% y/y and exports to China by 13.0%. At the same time, import growth remains robust, outpacing export growth in the first five months of 2026 (3.7% versus 3.0%). As a result of Germany’s fading competitiveness, newly erected trade barriers in the US, and higher import costs for energy, Germany’s still sizable current account surplus is projected to shrink in 2026-27, falling to 3.2% in 2027 (it was 5.8% in 2024).

Government increasingly unpopular

Following snap elections in February 2025 and the formation of a new coalition government between the centre-right CDU/CSU under Chancellor Friedrich Merz and the centre-left Social Democrats (SPD) under vice-chancellor and minister of finance Lars Klingbeil in May 2025, public support for the two partners has been falling steadily. Approval ratings for Merz have dropped to around 20%, the lowest reading ever recorded for any German chancellor and support for both parties has decreased to 22% (CDU/CSU) and 12% (SPD), respectively. Biggest beneficiary is the far-right AfD: on the federal level, it is polling at around 28% now, which would make it the biggest party in the Bundestag, the lower house of parliament. The AfD is set to perform very well in three upcoming regional elections in Eastern Germany this autumn. In the state of Sachsen-Anhalt, it could win an outright majority (currently polling at 42%) in the September election and form its first regional government. Such a result would further destabilise the federal government, potentially triggering a leadership challenge in the CDU/CSU and creating calls amongst centre-right politicians to abandon its current “firewall policy” which forbids cooperation with the AfD. Pressure on Chancellor Merz has already been mounting by July, following a botched cabinet reshuffle that alienated large parts of his own parliamentary group.

Furthermore, the government has agreed on implementing meaningful (but still not sufficient) social welfare reforms. Expert-led commissions proposed changes to the pension and healthcare systems in mid-2026 and the cabinet has signalled approval for the suggestions. Earlier this year, access to unemployment benefits has also been made stricter (a key campaign topic of the CDU/CSU) but the cost savings are not as substantial as initially anticipated. The reform proposals do face severe implementation risks in parliament, though. The pension reform foresees a higher retirement age as well as increased contributions for both employers and employees. These measures will prove unpopular with the electorate at a time when the government is already suffering from poor polling data. At the same time, the so-called Grand Coalition (as it includes the two once dominating political forces of post-war Germany) only holds a 12-seat majority in parliament. Such a fragile majority does not allow for too many dissenters on the government benches.

Payment

Bank transfer (Überweisung) remains the most common, means of payment. All leading German banks are connected to the SWIFT network, which enables them to provide a quick and efficient funds transfer service. The SEPA Direct Debit Core Scheme and the SEPA Direct Debit B2B are the newest forms of direct debit.

Bills of exchange and cheques are not used very widely in Germany as payment instruments. For Germans, a bill of exchange implies a critical financial position or distrust in the supplier. Cheques are not considered as payment as such, but as a “payment attempt”: as German law ignores the principle of certified cheques, the issuer may cancel payment at any time and on any grounds. In addition, banks are able to reject payments when the issuing account contains insufficient funds. Bounced cheques are fairly common. As a general rule, bills of exchange and cheques are not considered as effective payment instruments, even though they entitle creditors to access a “fast track” procedure for debt collection in case of non-payment.

Debt Collection

Amicable phase

The amicable collection is an essential step to the success of collection management. The collection process generally begins with the debtor being sent a final demand for payment, via ordinary or registered mail, reminding the debtor of their payment obligations.

According to the law for the acceleration of due payments (Gesetz zur Beschleunigung fälliger Zahlungen) a debtor is deemed to be in default if a debt remains unpaid within 30 days of the due payment date and after receipt of an invoice or equivalent request for payment, unless the parties have agreed to a different payment period in the purchase contract. In addition, the debtor is liable for default interest and reminder fees upon expiry of this period.

Debt collection is recommendable and common practice in Germany.

Legal proceedings

Fast-track proceeding

Provided the claim is undisputed, the creditor may seek order to pay (Mahnbescheid) through a simplified and cost-efficient procedure. The creditor describes the details of their claim and is subsequently able to obtain a writ of execution fairly quickly via the Online-Dunning Service (Mahnportal), direct interfaces or (only for private individuals) pre-printed forms. Such automated and centralised (for each Bundesland, federal state) procedures are available all over Germany.

This type of action falls within the competence of the local court (Amtsgericht) for the region in which the applicant’s residence or business is located. For foreign creditors, the competent court is the Amtsgericht Wedding (in Berlin). Legal representation is not mandatory.

The debtor is given two weeks after notification to pay their debts or to contest the payment order (Widerspruch). If the debtor does not object within this timeframe, the creditor can apply for a writ of execution (Vollstreckungsbescheid).

Ordinary proceedings

During ordinary proceedings, the court may instruct the parties or their lawyers to substantiate their claim, which the court alone is then authorised to assess. Each litigant is also requested to submit a pleading memorandum outlining their expectations, within the specified time limit.

Once the claim has been properly examined, a public hearing is held at which the court passes an informed judgement (begründetes Urteil).

The losing party will customarily bear all court costs, including the lawyer’s fees of the winning party to the extent that those fees are in conformity with the Official Fees Schedule (the Rechtanwaltsvergütungsgesetz, RVG). In the case of partial success, fees and expenses are borne by each party on a pro rata basis. Ordinary proceedings can take from three months to a year, while claims brought to the federal Supreme Court can reach up to six years.

An appeal (Berufung) may be brought against the decision of the Court of First Instance if the objected in exceeds €600. An appeal will also be admitted by the Court of First Instance if a case involves a question of principle or necessitates revision of the law in order to ensure “consistent jurisprudence”.

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Enforcement of a Legal Decision

Enforcement may commence once a final judgement is made. If debtors fail to respect a judgment, their bank accounts may be closed and/or a local bailiff can proceed with the seizure and sale of their property.

For foreign awards, in order to obtain an exequatur, the creditor needs a notarised German translation of the decision which also has to be recognised, an enforcement order of this judgment, and an execution clause. Judgments of courts of EU member states are recognised without further procedure – unless certain restrictions arising from European law are applicable.

Insolvency Proceedings

OUT-OF COURT PROCEEDINGS

Debtors may attempt to renegotiate their debts with their creditors, which helps to protect debtors from early payment requests. However, the procedure is in the creditors’ interest as it can be faster and tends to be less expensive than formal insolvency.

RESTRUCTURING

Following a petition filed before insolvency court on the basis of illiquidity or over-indebtedness, the court may open preliminary insolvency proceedings, where it appoints a preliminary administration aimed at exploring the chances of restructuring the company. If the administration authorizes this restructuration, it then initiates formal proceedings and nominates an administrator in charge of continuing the debtor’s business whilst preserving its assets.

LIQUIDATION

Liquidation may be initiated upon demand of either the debtor or the creditor provided that the debtor is unable to settle its debts as they fall due. Once recognized through a liquidation decision and once the company has been removed from the register, the creditors must file their claims with the liquidation administrator within three months of the publication.

RETENTION OF TITLE

This is a written clause in the contract in which the supplier will retain the ownership over the delivered goods until the buyer has made full payment of the price. There are three versions of this retention:

simple retention: the supplier will retain the ownership over the goods supplied until full payment is made by the buyer;

expanded retention: the retention is expended to further sale of the subsequent goods; the buyer will assign to the initial supplier the claims issued form the resale to a third party;

extended retention: the retention is extended to the goods processed into a new product and the initial supplier remains the owner or the co-owner up to the value of his delivery.

Last updated: August 2026