Europe
German economic recovery delayed until 2026, new forecasts show
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.
Europe
German officials urge fighter jet alliance with Sweden and Spain
German Defence Ministry officials have advised Berlin to form a new fighter jet partnership with Sweden and Spain rather than join an existing UK-led consortium.
Internal ministry assessment notes obtained by Politico state that a trilateral arrangement among Germany, Sweden, and Spain represents a “more advantageous and promising” approach than joining the Global Combat Air Programme (GCAP) run by the UK, Italy, and Japan.
The proposal outlined in the document does not yet represent a final government decision, nor does it contain any indication that German Defence Minister Boris Pistorius has approved the recommendation.
The advice was drafted after Germany’s flagship project with France to build a next-generation fighter jet collapsed in June following years of industrial infighting.
Initiated in 2017 and later joined by Spain, the Future Combat Air System (FCAS) was conceived as a showcase initiative for European defence cooperation. The partnership aimed to develop an aircraft to replace Germany’s Eurofighter fleet starting in 2040.
However, the initiative foundered on disputes over operational control and workshare between France-based Dassault and Germany-based Airbus Defence and Space. Following unsuccessful rescue attempts at the political level, Berlin withdrew from the joint fighter project this year.
UK Prime Minister Andy Burnham raised the prospect of Germany joining GCAP during an 8 October meeting in Berlin with Friedrich Merz. The two leaders agreed that officials should continue discussions.
For Berlin, the choice carries implications that reach far beyond which model its air force will fly. The decision will determine who controls future military technology, which countries secure production contracts, and whether a new European partnership can avoid the frictions that dismantled FCAS.
Ministry assessment keeps distance from UK-partnered GCAP project
The ministry assessment listed several reservations regarding the GCAP project. The report argued that the existing programme focuses on operations beyond Germany’s capability requirements, whereas Berlin needs an aircraft better suited for missions over continental Europe.
The document also noted that German manufacturers would struggle to secure a significant share of development and production work within an already established partnership.
Invoking past experiences with the Eurofighter programme, which was developed in the 1990s and entered service in the early 2000s, the document took direct aim at British defence contractor BAE Systems.
The German Defence Ministry assessment accused BAE Systems of prioritizing exports over the development interests of Germany and Italy, warning that British dominance would prove incompatible with an equal partnership.
By contrast, the document stated that the military requirements of Germany, Sweden, and Spain align closely and that their starting positions are well balanced.
The assessment proposed an industrial partnership between aerospace giant Airbus and Sweden’s Saab, while recommending that the Saab-manufactured Gripen E fighter jet serve as a technological stepping stone until the new aircraft is developed.
The German Defence Ministry declined to comment on the matter. A separate ministry note, however, recorded British efforts to integrate Germany into GCAP as an observer or participant, asking German officials to examine potential industrial roles and military requirements.
An Airbus spokesperson said the company was “generally open to cooperation”, provided that German and Spanish industry secured a “substantial and equal role” across development, production, and operational phases.
“Purely political decisions without an industrial foundation remain insufficient,” the spokesperson said, urging authorities in Berlin and Madrid to clarify the path forward swiftly.
In an interview published in Handelsblatt on Monday, Airbus defence chief Michael Schollhorn pointed to ties with Saab, noting that the two companies have always worked well together.
A Saab spokesperson also indicated that the company is receptive to broad defence cooperation, including in fighter aircraft.
Emphasizing that large-scale collaborative projects are handled at the political level and that participation decisions rest with the respective governments, the spokesperson said: “All questions regarding potential Swedish participation should be directed to the Swedish government. Saab stands ready, as always, to support Sweden’s future fighter aircraft requirements.”
Europe
EU reopens debate on naming envoy for Ukraine talks with Putin
The European Union has returned to the idea of appointing an envoy to hold talks on Ukraine with Russian President Vladimir Putin.
According to sources familiar with the matter who spoke to Politico, this search gained fresh momentum following a visit to Russia by Steve Witkoff, the US special envoy.
During his trip, Witkoff proposed to Putin that Russia, the US, and Ukraine hold trilateral talks.
European countries, meanwhile, fear that Washington could accept terms unfavourable to Kyiv in negotiations that exclude them.
Sources speaking to Politico said the names being discussed for the envoy role include European Commission President Ursula von der Leyen, European Council President António Costa, and EU High Representative for Foreign Affairs and Security Policy Kaja Kallas.
Some European diplomats believe Finnish President Alexander Stubb may be the most suitable candidate for the post.
Stubb’s good relations with Trump and Finland’s experience in dealing with Russia are cited among the factors setting him apart.
An unnamed EU diplomat described Stubb as the only European politician so far to have demonstrated senior-level leadership.
Another group of diplomats argues that Costa should lead the talks. European leaders asked Costa during last week’s EU summit in Brussels whether the time had come to speak with Putin.
Politico’s source recounted that exchange: “Costa said no, saying he would not speak to Putin right now. But if we want to play a role in the negotiations, Costa still needs to initiate dialogue with Putin.”
According to an assessment by another source, the European Council president could serve as a more neutral mediator than von der Leyen or Kallas, who are seen as overly focused on supporting Ukraine.
“Three or four people cannot go there with each of us speaking on behalf of the European Union,” one of the sources told the publication. “Ultimately, the choice of who represents the EU must be based on maximum efficiency, not on a personal power struggle or someone’s narcissistic ambitions.”
Politico previously reported in January that the EU was considering appointing a special representative for Ukraine negotiations. At the time, the initiative drew support from several European leaders, including French President Emmanuel Macron and Italian Prime Minister Giorgia Meloni.
Putin said he was ready to negotiate with European countries, but asserted that Europe had “no peace agenda” and stood “on the side of war”.
The Russian leader also named former German chancellor Gerhard Schröder as Moscow’s preferred negotiator from Europe.
Kallas ruled out such an appointment, noting that Schröder was “a lobbyist for Russian state companies” and would sit “on both sides of the negotiating table”.
Stubb details obstacles to talks and Oslo diplomatic drive
Finnish President Alexander Stubb said the principal obstacle to ending the war between Russia and Ukraine was the territorial issue.
Stubb took part in talks in Oslo with US envoy Steve Witkoff, who subsequently travelled to Saint Petersburg to meet Vladimir Putin.
As reported by the newspaper Helsingin Sanomat, Stubb stated that advancing the peace process required either bilateral talks between Russia and Ukraine or trilateral negotiations involving the US.
The Finnish president listed the other major items to be addressed within a settlement as US security guarantees for Ukraine and the construction of a new European security architecture after the war ends.
Without stating it outright, Stubb implied that the core issue within this framework was Ukraine’s NATO membership. The Finnish leader pointed to monitoring the ceasefire, establishing the line of contact, ensuring energy and food security, and exchanging prisoners as practical tasks.
Stubb also detailed the talks held in Oslo on 20 October, which included Witkoff, Ukrainian President Volodymyr Zelenskyy, and Norwegian Prime Minister Jonas Gahr Støre.
The discussions, which spanned approximately eight hours across various formats, had three objectives: to lower tensions in public discourse, to convey European and Ukrainian proposals to the US envoy before his visit to Russia, and to determine the next steps toward a peaceful settlement. Stubb announced that these goals had been achieved.
Moscow ready to resume trilateral talks in November
Witkoff met Putin in Saint Petersburg on Wednesday.
Following the meeting, Russian presidential aide Yuriy Ushakov announced that Moscow was prepared to resume trilateral negotiations with the US and Ukraine during the first half of November.
Ushakov also said that the EU and NATO had begun to “take a more serious approach” to Kremlin proposals on Ukraine, adding that “matters” were moving toward an end to the conflict.
Witkoff described the meeting as “constructive”.
Sources told Bloomberg in September that Putin continued to insist the Donetsk region must come fully under Russian control, expressing confidence that the territory would be captured within the next six months.
Putin previously set conditions for ending the war, demanding that Ukraine abandon plans to join NATO, maintain a neutral and non-nuclear status, and that anti-Russian sanctions be lifted.
Europe
Trump midterms calculus halts Israeli strike plan against Iran
A comprehensive military operation planned by the Israeli military for 10 October did not take place because US President Donald Trump chose to avoid a broad conflict before the 3 November congressional midterm elections.
Preparations had been made on the orders of Prime Minister Benjamin Netanyahu for an aerial bombardment meant to last several days, according to a report by the Financial Times citing sources familiar with the matter.
The list of targets included nuclear facilities and locations associated with the Iranian leadership, along with power stations and other civilian infrastructure sites.
The planned strikes were projected to exceed the joint operation launched by the US and Israel in February in terms of intensity.
White House Deputy Press Secretary Anna Kelly told the newspaper: “The United States is not going to strike Iran at any point before the midterms.”
Kelly argued that the administration in Tehran was in distress both economically and militarily, adding that the blockade imposed on Iranian ports and US efforts to secure oil shipments through the Strait of Hormuz were producing results.
Speaking to the newspaper, one source addressed the possibility of strikes resuming in the coming weeks, saying: “There’s either going to be a deal or a strike.”
The same source reported that Washington aims for a comprehensive settlement that resolves the conflict over both the Strait of Hormuz and the nuclear programme, although it remained unclear whether the US would have participated directly in the cancelled operation.
Another source said the preparations for the operation might have served as leverage to pressure Tehran in negotiations, adding that the final decision on any new military step rests with the US president.
Hegseth reviews updated target list in Israel
An Israeli official said US Secretary of War Pete Hegseth visited Israel on 19 October to meet with Netanyahu and senior representatives.
Another source stated that the Israeli side presented an updated target list to its American counterparts, compiled with fresh intelligence and incorporating civilian infrastructure sites that had not been struck earlier this year.
The Pentagon did not respond to questions regarding the meetings, while Netanyahu’s office and the Israeli military declined to comment.
Despite the postponement of the operation, Trump and Netanyahu continued to issue military warnings to Iran in public.
In a video released on 19 October, Netanyahu addressed Trump, saying: “Donald, you said we need to finish this, and we will finish it together.” Speaking on speakerphone, Trump responded: “You’re a great warrior, and we’re going to prove it very soon.”
These engagements between the leaders coincide with critical election cycles in both countries.
Parliamentary elections in Israel are scheduled for 27 October, one week before the vote in the US.
Most public opinion polls in the country show the opposition bloc holding a narrow lead over Netanyahu’s coalition, though neither side commands a clear majority.
Axios, a US-based news outlet, previously reported that the Pentagon instructed military planners to finalize strike plans against Iran, though the directive specified no date and Trump had not reached a final decision.
On 15 October, CNN reported on plans to use the GBU-43/B munition, known as the “mother of all bombs”, against Iranian nuclear facilities, with US officials who spoke to the broadcaster expressing scepticism about the weapon’s ability to destroy deep bunkers.
While Tehran announced that it remains open to a diplomatic solution, it declared that any potential operation would draw a fierce response.
Iranian Foreign Minister Abbas Araghchi stressed that if its adversaries chose military conflict, the response would be “much harsher than before”.
Following the joint operation launched by the US and Israel on 28 February, Iran retaliated by striking targets across the region and restricting maritime passage through the Strait of Hormuz.
Although the parties reached an agreement in June covering a ceasefire and negotiations to lift the blockade in the strait, reciprocal strikes between the US and Iran have not ceased.
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