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German economic recovery delayed until 2026, new forecasts show

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Germany’s leading institutes expect a slight recovery in the German economy in 2026 at the earliest, but even this will come at a heavy price.

Signs of hope for the German economy from a few months ago have already vanished. Leading economic research institutes lowered their economic forecasts for 2025 on Thursday.

According to an analysis in Handelsblatt, the Kiel Institute for the World Economy (IfW) now predicts that gross domestic product (GDP) will grow by only 0.1%.

The Essen-based Leibniz Institute for Economic Research (RWI) forecasts 0.2% growth, while the Ifo Institute also predicts 0.2% growth. The Halle Institute for Economic Research’s (IWH) growth forecast is also 0.2%.

At the beginning of the summer, they were forecasting average growth of around 0.3% for 2025.

The main reason for the downward revision is that the government’s stimulus measures have been less effective than previously predicted, and the electricity tax was reduced only for industry.

The institutes do not expect another recession—a contraction of economic output for two consecutive quarters—within this year.

Following a 0.3% fall in GDP in the second quarter, minimal growth is expected from the third quarter onwards.

However, according to the forecasts, there will be no stronger momentum after that.

This is not good news for the federal government. Chancellor Friedrich Merz had promised an “economic turning point” and made a return to growth his most important goal.

Germany’s GDP is currently at a level similar to that of 2019, before the coronavirus pandemic and the war in Ukraine.

“The driving forces for a self-sustaining recovery are still weak,” says IfW chief economist Stefan Kooths.

The low probability of this situation changing this year is likely to intensify debates within the federal government about economic policy reforms.

Although the institutes expect more growth in the years after 2025, a closer look at five points in the forecasts shows that this is no reason for enthusiasm.

1. The hope for growth: Revival will only come in 2026

Germany may experience a revival again starting next year.

The IfW expects growth of 1.3% in 2026. The institute’s initial forecast for 2027 is 1.2%.

The RWI forecasts 1.1% growth in 2026 and 1.4% in 2027.

The Ifo Institute expects 1.3% growth next year and 1.6% the year after.

The IWH, however, offers a much more pessimistic forecast, predicting 0.8% growth for 2026 and 0.6% for 2027.

The labor market will be the biggest beneficiary of this. Although the unemployment rate is still at 6.3% this year, it is projected to fall to 5.8% by 2027.

Compared to the forecasts made at the beginning of the summer, this still represents a setback. At that time, the institutes were expecting average growth of around 1.5% for next year.

2. Growth is financed by the state

In addition, next year’s revival will not only be smaller but will also come at a high price.

The federal government is artificially stimulating growth by significantly increasing debt in infrastructure and defense, and through energy price subsidies, super-depreciation for companies, and tax cuts for the restaurant sector and senior citizens.

The IfW estimates that the government will pump an additional 42 billion euros into the economy in this way by 2026. The forecast for 2027 is 22 billion euros.

According to the IfW’s calculations, the government’s expansionary fiscal policy alone accounts for 0.6 percentage points of the expected growth next year. In 2027, this figure will be 0.3 percentage points.

The RWI’s figures are similar: the institute estimates that government stimulus will boost growth by about 0.5 percentage points in both years.

The problem is that increased government spending does not automatically increase the economy’s growth potential. The numerous contracts the government will award may not lead to an expansion of production capacity but could instead cause prices to rise.

Germany is particularly exposed to this situation because the supply of additional labor is shrinking due to demographic change, and bureaucratic burdens and insufficient digitalization make capacity expansion unattractive.

“In the long run, state investments cannot replace private sector activity,” says RWI Chief Economist Torsten Schmidt.

This also overshadows the joy over the falling unemployment rate: new jobs are mostly being created in the government-related service sector, which is significantly less productive than German industry, where job losses continue.

At the same time, government spending is leading to significantly higher borrowing: according to the RWI, the general public deficit ratio—the ratio of the public sector’s annual new debt to economic output—will rise from 2% this year to 3.6% by 2027.

There is another special effect: in 2026, the number of working days will increase significantly, for example, because public holidays will more frequently fall on weekends. This effect accounts for another 0.3 percentage points of the projected growth in 2026.

“Without these effects, the remaining recovery would be extremely weak, so one cannot speak of a self-sustaining upswing,” write the IfW experts.

When these two effects are not taken into account, only 0.4% GDP growth remains as the “real recovery” in 2026.

The adjusted growth for 2027 is 0.8%. According to the RWI’s assumptions, the adjusted GDP change is only 0.3%. In 2027, this rate will be 0.8%.

The state-led recovery is also confirmed by private sector figures. According to the RWI, private sector investment in equipment will decrease by 2.3% in 2025 and will show only a moderate recovery of 2% and 1.7%, respectively, in the following years, despite improved depreciation conditions.

In contrast, government investment in equipment will increase by about 11% to 22% during the same period. Private consumption will not increase by even 1% next year and the year after, partly due to a slowdown in wage growth.

3. Brakes on growth: Underutilization of capacity

Apart from the record level of state orders, the economic environment remains complex.

There are several developments that hinder a “real revival” and cause German companies to produce far less than they currently could. According to Handelsblatt, the underutilization of capacity is among them.

One reason for this is the tariff agreement for exports to the US. The uncertainty surrounding this and the 15% tariffs are negatively affecting Germany’s exports, one of its most important activities.

According to IfW calculations, US tariffs will reduce economic output by 0.3% in 2025 and 2026, which is equivalent to 13 billion euros.

Another risk is the tension in international financial markets. Risk premiums on government bonds have increased significantly in recent days.

4. Industrial capacity is shrinking

On the other hand, an improvement in external conditions alone will not be enough for Germany to experience a real revival again.

The reason for this is that, parallel to the underutilization of the German economy’s capacity, the structure of the economy is also changing.

Production capacities are not only being underutilized but are apparently being permanently reduced. This means that even if the German economy returns to normal capacity utilization, higher growth rates may no longer be possible.

This is particularly true for industry. The value added of industry is currently more than 4% below the 2019 level. The IfW writes, “In this context, the extremely low capacity utilization may indicate that there is less room for economic recovery and instead points to a further reduction in production capacity.”

According to the RWI, another piece of evidence for this is that although companies’ business expectations for the next six months have recovered slightly, they still assess their situation as poor.

According to the economists, companies are pinning their hopes more on government programs than on an improvement in local conditions.

5. Reforms to slow down structural change

According to the institutes, “structural reforms” that allow for capacity development are necessary to stop this trend.

If this happens, the numerous government contracts resulting from new debt could also ensure that this leads to sustainable growth.

The economists primarily recommend reforms for the social security systems and energy policy. RWI expert Schmidt says, “The government’s spending programs can stabilize the economy in the short term, but they do not solve the fundamental competitiveness problems of the German economy.”

In social policy, it is argued that systems should be designed to encourage more citizens to work in order to slow the decline of the working population for demographic reasons.

According to the institutes, the priority in the energy sector should be to lower energy prices in Germany and increase the security of supply to stop the migration of companies to countries with better energy resources.

Experts believe that structural regulations in the energy market are more important than energy price subsidies.

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Bundeswehr troop figures mask severe structural imbalances

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The German Ministry of Defence has set a series of priority targets for the second half of the year. Led by Boris Pistorius (SPD), the ministerial leadership is satisfied with the government’s draft federal budget, which is scheduled for adoption by the Bundestag at the end of November.

According to a report by the newspaper Welt, the fundamental issue that officials do not openly voice in public is the necessity of converting resources allocated from tax revenues and loans into military capabilities as efficiently as possible, given that disruptions continue to occur in this area.

Regarding new infrastructure construction, the process is generally assessed to be proceeding as planned.

The objective this year is to add approximately 9,000 new bed spaces to barracks, with the initial allocations to these beds having begun in recent days.

Over the next four years, plans envisage incorporating roughly 54,000 additional beds into the system alongside new buildings.

Despite all these areas, personnel continues to be the single largest problem area in the armed forces.

In a statement issued at the beginning of the week, the ministry reported that the number of active-duty soldiers reached 186,700 as of 31 July, marking the highest level in approximately 13 years.

Although this figure falls considerably short of the ultimate target of 260,000 troops to be reached by 2035 at the latest, the ministry argues that the current figure lies “within the projected target corridor for personnel growth”.

This stems from an agreement initially reached with the Bundestag on a relatively slow trajectory of expansion. The planning in question projects an active strength of between 186,000 and 190,000 personnel by the end of the year.

The ministry projects that, “in line with general positive developments in the recruitment process, the Bundeswehr’s personnel growth will maintain its positive trajectory until the end of the year, despite the impact of seasonal fluctuations”.

However, not all observers share this assessment. In a post published on LinkedIn, the former Chief of the German Army, Lieutenant General Alfons Mais, made the following evaluations:

“Looking at these announcements, one could easily get the impression that the constitutional mission of the Bundeswehr is to employ as many people as possible. The key question is: Where does this additional strength, including personnel whose service has been extended, contribute to the defence mission? In administrative posts? In territorial defence? In the reserve elements of operational units? In closing existing personnel gaps in active units? In augmenting new capabilities aimed at NATO planning targets? In Lithuania?”

Pointing out that the issue is not merely one of quantity but of quality—namely deploying the right personnel in the right places—Mais indicates that personnel must not be stationed solely in headquarters, but in artillery battalions, naval surface units, fighter aircraft squadrons, or the electronic warfare domain.

Indeed, the ministry is also aware of the structural problems highlighted by the retired lieutenant general.

Even as politically desired record figures are made public, officials in the Bendlerblock acknowledge that the Bundeswehr’s personnel structure must be returned to a pyramid form to adopt a defence posture suitable for potential crises and wartime situations.

In ministry corridors, there is talk that the military in its current structure has “accumulated too much fat” and that its administrative middle has grown cumbersome.

In the pyramid model considered ideal for the armed forces, generals and staff officers form the apex, while junior enlisted personnel and privates constitute the broad base; officers and non-commissioned officers occupy the space between these two tiers.

A large base combined with a small number of command positions guarantees both a young and physically resilient force and the steady advancement of the most capable personnel to higher ranks through continuous selection.

This model also provides cost efficiency and delivers high mobilisation capacity through personnel who transition into the reserves upon completing their service.

Today, however, the Bundeswehr possesses not only a bloated upper echelon but also a disproportionately broad middle tier, resulting in a cumbersome institutional torso.

The ranks of young enlisted personnel remain insufficient, while older officers are present in surplus. A major who lacks sufficient troops to command produces no military added value; moreover, the prolonged retention of senior personnel prevents the promotion of younger soldiers.

Consequently, defence expenditures are absorbed by high salaries for mid- and senior-level staff rather than being channelled into combat strength, equipment, or the next generation of personnel.

Despite the ministry’s recognition of this dynamic, no concrete transformative steps have yet been taken in practice.

An ageing force with no gain in deterrence

To sustain positive personnel statistics alongside new recruitment, the Pistorius leadership is resorting to “retention measures” aimed at keeping contract and regular personnel in the armed forces beyond the conclusion of their service terms.

Since April, the minister has been sending personalised letters to non-commissioned officers and officers.

Opening with an expression of gratitude for their service, the letters state:

“Your final days in active service coincide with a period of profound upheaval. Our country and our continent face immense challenges. In this process, the Bundeswehr’s mission is becoming even more critical. Personnel growth is therefore our primary focus. This growth can only be achieved with qualified, high-performing, and above all dedicated soldiers—experienced comrades like you. Let us look at your professional future together. Your contribution matters every single day.”

The ministry defends these and similar retention measures solely on the basis of quantitative targets. According to its statement, “targeted individual advisory measures” conducted in 2025 alone prompted thousands of service members across all statuses and branches to extend their terms of service.

Yet this method resonates primarily among older regular personnel. As of the end of July 2026, the strength of regular and contract soldiers rose by approximately 3,000 compared to the previous year, reaching 174,700.

The primary driver of this increase was the rise in regular soldiers, whereas contract personnel numbers recorded a slight decline.

Although 56-year-old regular soldiers whose physical performance may be limited remain necessary due to specialised expertise, this sweeping policy slows the effort to reshape the personnel structure into a pyramid.

As the armed forces age in practice, debate continues over whether this approach converts the military into a more effective and hard-hitting force.

The ministry is also hesitant to publicly disclose the true scale of the personnel shortfall. The gap is not merely the 73,300 soldiers separating the current strength of 186,700 from the 260,000 target.

Regular personnel briefings omit the number of departures from the armed forces—namely the actual requirement for replenishment and replacement.

Over the past three years, an average of 14,000 regular and contract soldiers departed the Bundeswehr annually. According to the ministry’s response to an information request, this figure stood at roughly 14,600 in 2025, with similar numbers expected this year. Conscripts completing their term of service add to these totals.

A ministry spokesperson stated that they could not provide a five-year projection because the data fluctuates continuously and remains highly volatile. However, such an estimate is not difficult to deduce.

Following the suspension of compulsory military service in 2011, then-Defence Minister Thomas de Maiziere (CDU) began tying contract soldiers to extended service terms of 20 to 25 years under the “Personnel Structure Model 185”.

As the service terms of these personnel expire in the coming years, replacement requirements will rise substantially.

Experienced personnel planners agree that approximately 30,000 new recruits must enter the armed forces annually in the future to achieve the targeted growth.

Current figures fall far short of this requirement. The annual net personnel gain stands at only around 3,700 compared to the previous year; furthermore, this expansion risks being eroded by regular attrition rates exceeding 20%. The implementation of the new military service model is also failing to progress at the intended pace.

By the end of July, a total of 378,000 letters were dispatched under the military service questionnaire initiative, including roughly 194,000 to young men and approximately 184,000 to young women.

Roughly 96% of the men, for whom completing the questionnaire was mandatory, fulfilled their obligation. Among women, for whom participation was voluntary, the response rate remained at 4%.

Approximately 2,630 individuals who expressed interest underwent evaluation; following this process, 865 individuals were scheduled for deployment within the Bundeswehr.

This situation underpins retired Lieutenant General Mais’s scepticism toward the defence leadership’s personnel bulletins.

Mais underscored the gravity of the situation: “One cannot conceal qualitative deficits simply by cheering marginal numerical gains!”

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Europe builds drone defence walls along eastern flank against UAVs

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On the night of 20 August, an uncrewed aerial vehicle crashed near the Ukrainian border in Romania, marking the fourth such incident in the country within a single month.

The Romanian Ministry of National Defence announced that the drone, which had entered national airspace, came down in an uninhabited area approximately 4 kilometres north-east of the village of Grindu. On the same day, Moldova’s Ministry of Internal Affairs reported that UAV wreckage had been located one kilometre from the Ukrainian border.

Over the past month, at least six incidents involving airspace violations or crashes of unidentified UAVs have been recorded across Europe, including in Germany, Bulgaria, Latvia, Romania, and Moldova. Several regional states suggested that Russia may have been involved in these occurrences.

Following the crash and detonation of a military drone near the village of Crocmaz, Moldova recalled its ambassador to Moscow for consultations on 10 August.

Moldovan Defence Minister Anatolie Nosatii stated on 12 August that initial data indicated the UAV was of Russian origin, adding that experts were continuing to examine the wreckage.

Russian Foreign Ministry spokeswoman Maria Zakharova rejected the allegations, stating that Moscow does not fly UAVs through the airspace of states neighbouring Ukraine, including Moldova, and does not plan such flight paths.

According to a report by The Wall Street Journal (WSJ), the US administration decided to disband a strike battalion established in Europe in January to advance UAV warfare tactics.

Speaking to the newspaper, an unnamed US Army official said the unit would present its findings to command following large-scale exercises conducted in Germany in August and September, before reverting to its primary combat mission as an airborne infantry battalion.

Incidents involving unidentified UAV violations of European airspace have grown more frequent since the autumn of 2025.

In response to these developments, the European Union began discussing the construction of a collective defence mechanism along NATO’s eastern flank, termed a “drone wall”.

The European Commission presented the concept to the public in October 2025 under its Defence Readiness Roadmap 2030.

The planning envisaged the implementation of two projects: the European Drone Defence Initiative and Eastern Flank Watch.

The first project aims to establish a joint EU-Ukraine Drone Alliance. A €6 billion loan was allocated to fund this initiative under the G7’s Extraordinary Revenue Acceleration (ERA) programme in support of Kyiv.

Under the Eastern Flank Watch project, the EU aims to build a unified European defence system in close coordination with NATO against a broad spectrum of threats, including hybrid operations, Russian “shadow fleet” activities, and the risk of armed attack.

Encompassing multi-layered surveillance systems, anti-drone technologies, electronic warfare assets, and precision strike systems, the project is slated for deployment across all countries along the EU’s eastern border, including land and maritime frontiers with Russia and Belarus. The system is planned to become operational by the end of 2028.

European Commission President Ursula von der Leyen announced on 15 July that an agreement on joint UAV production had been signed between the EU and Ukraine.

“Ukraine has the ingenuity, what it needs is scale. Together we can deliver that, so that Ukraine keeps its edge and Europe reinforces its own strength,” von der Leyen said.

Formally launched two days later, the Drone Alliance was designed as a platform bringing together Ukrainian and European manufacturers of UAVs and countermeasures.

A total of 18 companies joined the initiative, nine from each side. Firms on the European side include ORQA, Indra Group, Fincantieri, and WB Electronics/WB Group.

Europe also deepened its cooperation with the US during this period. According to information reported by the WSJ, the decision to form a specialised battalion within the 173rd Airborne Brigade to study the Ukrainian experience was taken in November 2025.

Under the plan devised by former Chief of Staff of the US Army General Randy George, the concept’s architect, a small group of American soldiers from the approximately 600-strong battalion made covert visits to Kyiv to meet with Ukrainian officials. The unit also conducted joint work with Ukrainian UAV operators at NATO combat training areas.

The decision to end the battalion’s activities was reportedly taken under the influence of Acting Secretary of the Army Christopher Laniwe, who is known for his close ties to US Secretary of Defense Pete Hegseth.

The WSJ previously reported that US troops’ vulnerability to UAVs was exposed during the Combined Resolve exercises held in Germany in April and May, where Ukrainian drone operators detected and simulated strikes against American units and armoured vehicles.

Transatlantic cooperation continues across various channels. At the Industrial Forum in Ankara in July, NATO Secretary General Mark Rutte announced the NATO Drone Edge initiative, aimed at developing UAV systems and counter-drone capabilities.

Alliance members agreed under this framework to allocate more than $40 billion over five years and to quintuple the number of trained UAV operators by the end of 2027.

“We are using the latest innovative technologies, investing in our transatlantic defence industry, and drawing practical lessons from the fighting in Ukraine,” Rutte said.

During the same period, Germany, Denmark, Finland, and Norway signed a letter of intent for the joint procurement of MQ-4C Triton long-range, high-altitude UAVs, developed by Northrop Grumman for the US Navy.

Germany has become one of the most active countries in the field of UAV technologies and defence. In early August, a UAV containing Semtex-type explosives was discovered at Leipzig/Halle Airport near a Ukrainian An-24 transport aircraft believed to be carrying ammunition.

German Interior Minister Alexander Dobrindt stated that his country had become the “target of hybrid warfare” conducted by foreign states, though he did not name a specific country. No further official statements were issued by senior authorities regarding the incident.

The Bild and Die Zeit newspapers reported that DNA traces found on the UAV matched DNA samples from a 2024 arson attack at a DHL freight facility in Leipzig, which German investigators linked to Russian sabotage operations.

Die Zeit also reported that security services were considering the possibility that the operation might have been conducted by Ukraine as a false flag action intended to induce the Berlin government to provide greater support against Russia.

The Russian Embassy in Berlin described the incident as a provocation, stating: “It is obvious that this hastily orchestrated provocation serves solely the objectives of Kyiv and the militarist wing of the European political class.”

Amid these developments, the Drone Defence Technology Centre was officially opened on 18 August at the German Aerospace Centre (DLR) test airfield in Magdeburg-Cochstedt.

The facility aims to combine scientific research, technology, and the requirements of security agencies to accelerate the development of UAV detection and interception systems. The centre houses the mobile anti-drone unit of the Federal Police alongside a joint UAV coordination centre established by federal and state authorities.

Speaking at the opening ceremony, Dobrindt emphasised: “The arms race in the UAV sector requires us to establish our own research units to keep pace with technological developments,” noting that Germany faces daily hybrid attacks from foreign states due to its pivotal role in Europe’s economic and political security.

Up to €10 million is expected to be allocated in the coming years for the development of the centre.

German Defence Minister Boris Pistorius presented the country’s first military strategy document in April. The document noted that Russia would remain the “greatest security threat” to Europe for the foreseeable future.

According to the text, Moscow aims to reshape the European security architecture by weakening NATO. In the section titled “Threat”, the document stated: “Russia is creating the preconditions for a military attack against NATO countries. This is already leading to hybrid operations being conducted against alliance member states, including Germany.”

The Polish government has also accelerated work on its air defence perimeter. Having announced an anti-drone wall project named SAN along its eastern border in January, Warsaw is executing the €3.8 billion project through a consortium comprising state-owned Polska Grupa Zbrojeniowa, Norway’s Kongsberg, and the private Polish firm Advanced Protection Systems.

Polish Deputy Defence Minister Cezary Tomczyk announced that 18 specialised anti-drone air defence batteries—comprising APKWS missile launchers, anti-aircraft artillery, machine guns, and interceptor UAVs—would be deployed, with work scheduled for completion by 2028.

The Baltic Drone Wall initiative, announced in January 2025 by Estonia, Latvia, Lithuania, Poland, and Finland, is likewise targeted for completion by the end of 2026.

Designed to protect the eastern flank of the EU and NATO, the joint project provides for integrating radars, sensors, and interceptor UAVs into a single multi-layered network under centralised management. Participating nations plan to expand the network by the end of the year to ensure uninterrupted surveillance along the Russian border.

Experts from the European Council on Foreign Relations (ECFR) note that while the EU, NATO, and eastern flank states are making intensive efforts to address the UAV threat, the proliferation of initiatives risks causing duplication of effort and uncertainty for commercial entities participating in the projects.

“Greater coordination is needed to ensure coherence across initiatives, particularly at the level of data sharing,” the report stated. It also emphasised that capacity building within the European defence industry against the Russia-derived UAV threat can in no way replace diplomatic, political, and military measures.

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Denmark trains first conscripts in Greenland amid Arctic tensions

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Denmark has begun training its first group of soldiers in Greenland. Following claims over the territory by US President Donald Trump, Denmark has deployed conscripts to Greenland for the first time.

Copenhagen has increased its military presence in Greenland, a semi-autonomous territory within the Kingdom of Denmark, and has now deployed conscripts for the first time to the island’s capital, Nuuk, and the Kangerlussuaq airbase.

Captain Laura, a company commander currently leading the soldiers in Greenland, said: “The current state of the world means we need to become more accustomed to Arctic terrain.”

Greenland became the focal point of transatlantic tensions after US President Donald Trump laid claim to the territory.

Other European nations rushed to Denmark’s aid earlier this year before Trump, who had refused to rule out the possibility of military action, ultimately backed down.

At the height of the crisis, Denmark sent blood bags to Greenland and planned the destruction of the airstrips in Nuuk and Kangerlussuaq in order to slow the advance of a potential adversary as much as possible.

Approximately 300 professional soldiers are currently deployed in the region.

Around 100 soldiers from the Schleswig Foot Regiment will train in Greenland for roughly a month as the first cohort under Denmark’s new 11-month conscription programme, introduced in February 2026.

Defence Minister Jeppe Bruus stated in June that these young service members would be assigned there to “tasks that do not require longer-term specialist training”.

Denmark introduced gender-neutral conscription in the wake of the war in Ukraine that began in 2022.

Replacing the previous four-month programme, young Danes now undergo five months of basic training before serving the remainder of their term in operational assignments, such as deployment to Greenland.

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