A major shift toward more expansive fiscal policy will boost Germany鈥檚 growth from 2026 onward, while the near-term outlook remains burdened by an anticipated US-EU conflict over tariffs. Even before the formation of a new government after February鈥檚 elections, parliament voted with a two-thirds majority to create a 12-year, 鈧�500 billion off-budget fund for infrastructure and to expand the existing off-budget fund for defense without any specified limitation.

This major expansion of government investment, which will be exempt from Germany鈥檚 debt brake rules and not count toward the annual budget deficit, probably leads to additional public expenditures of about 1.5%-2.0% of GDP per year during the next decade. The nature of investment in defense and infrastructure, implying long lead times for planning and increases in output capacity, means that real GDP growth in 2025 will hardly be affected. From 2026 to approximately 2031, however, we have raised our forecasts for real GDP growth by about 50 basis points on average.

Fixed investment rebounded only modestly in the fourth quarter of 2024, having declined during most of 2023鈥�24. Persistently high uncertainty about domestic and foreign demand prospects has been decisive, reinforced by the shift to far-right parties in various domestic and European elections and by the German government鈥檚 self-imposed fiscal consolidation course.

Demand for construction started to recover in late 2024, and structural factors such as pent-up housing demand, migrant needs and now substantial additional public spending on transport, energy, IT infrastructure and the military will reinforce this from late 2025 onward. Investment in equipment faces a greater challenge given the structural loss in competitiveness owing to the loss of cheap Russian gas and a much tougher market for exports to China than in the past. Easing inflationary pressures are expected to allow the ECB to continue easing monetary policy. We forecast the ECB to cut rates by a further 50 basis points this year, with the deposit rate reaching a terminal rate of 2.0% during the third quarter of 2025.

Gradual recovery

Following an estimated decline of 3.1% in 2024, real total construction spending in Germany is forecast to rise by 1.3% in 2025. This signals a gradual recovery as still-high financing costs, geopolitical uncertainty and increasing protectionism should continue to undermine investor sentiment across the industry. The upturn expected in construction activity will be limited by previous declines in building permits and new orders before an acceleration in growth to 3.0% in 2026.

The latest Hamburg Commercial Bank (HCOB) Germany Construction Purchasing Managers鈥� Index (PMI) survey compiled by S&P Global showed that a lack of incoming new business remained an issue across the industry at the start of 2025. New orders fell at a marked and accelerated pace in January 2025, with surveyed firms attributing this to a lack of tender opportunities, high building and borrowing costs, and general weakness in the economy. As a result, building companies continued to reduce their workforce and purchasing activity, as they maintained a pessimistic outlook for construction activity over the next 12 months.

Residential construction spending in Germany fell by an estimated 4.9% in 2024 as buyers and builders pulled back from home purchases and project starts amid affordability and profitability concerns. The number of building permits issued also continued to trend downward over the year, and this should limit the recovery expected in residential construction growth to 1.1% in 2025. Moreover, while falling interest rates and rising real incomes

should attract buyers back to the market, affordability issues will likely remain as house prices gain momentum. Even as demand for housing shows signs of a recovery, indicators of supply remain weak with the number of building permits issued for dwellings falling by 18.9% year over year during the first 11 months of 2024, according to Destatis.

Investor appetite

In nonresidential structures, construction spending is estimated to have fallen by 1.8% in 2024 and a modest rebound in growth to 1.5% is expected in 2025, as weak economic growth and still-high financing and building costs continue to weigh on investor appetite for new developments. Given political uncertainty at home and the prospect of trade tensions, firms will likely remain cautious with respect to corporate building projects well into 2025.

As economic and financing conditions improve further, growth should then improve to 3.2% in 2026. Office construction, which dominates the nonresidential segment, will continue to be impacted by economic and political uncertainties and higher development costs, although several global real estate service providers, including Knight Frank LLP, expect a gradual increase in investment activity during 2025. That said, the shift toward hybrid working is increasing demand for high-quality space, particularly in central locations, that meet environmental, social and governance requirements and, as a result, the refurbishment or repurposing of existing office space will likely remain a key focus for many landlords and building owners.

Elsewhere in the nonresidential structures segment, many electric-vehicle microchip factory projects have been suspended or postponed because of high costs, financial issues and viability concerns over the past 12 months. Yet investment in renewable energy projects has increased in recent months, for example, Frankfurt approved a school building initiative in September 2024 that will see 鈧�1 billion invested in building and renovating schools over the next five years.

Infrastructure construction spending is expected to slow from an estimated 2.0% in 2024 to 1.8% in 2025 amid political uncertainties. Nonetheless, the sustained expansion will be driven by investment to renovate and modernize transport infrastructure, as well as various energy projects aimed at transporting electricity from renewable energy sources.

Additional spending

Furthermore, the creation of a new off-budget fund for additional spending on infrastructure could provide a boost to construction growth in 2026鈥�27. In August 2023, the government approved 鈧�211.8 billion for its Climate and Transformation Fund to finance various projects in building renovation, decarbonization and the industry between 2024 and 2027. Of the total funding, 鈧�57.6 billion was earmarked for 2024, including 鈧�4.7 billion for EV charging infrastructure and 鈧�4.0 billion for railway infrastructure.

The fund also set aside 鈧�12.5 billion for German railway operator Deutsche Bahn AG to renovate and expand the railway network between 2024 and 2027. However, funding cuts following a constitutional court ruling in November 2023 have raised questions about the delivery of planned projects. Infrastructure projects are also set to benefit from funds through the EU Recovery and Resilience Facility (RRF). However, it is worth noting that most of the funding will be spread out over several years and, as a result, will contribute only modestly to growth in the near term. So far, 鈧�19.8 billion (equivalent to 65% of the country鈥檚 鈧�30.3 billion financial allocation) has been disbursed by the European Commission to Germany to date.

The growth by segment indicates the nascent construction recovery beginning in 2025 and generally accelerating in 2026 with infrastructure the primary beneficiary. As one digs into the detail, transportation offers the strongest potential, although water and sewer construction also indicates strength. This is driven by the general announcement of significant federal investment and will be refined as details become available. The peak of the growth occurs in the 2028-2030 timeframe but note that growth continues at reduced rates for well over a decade.

Manufacturing is generally stronger than in our prior forecast, although the surge in defense spending spans several industries and accounts for a relatively small share of total manufacturing. Transportation equipment growth improves, but never quite regains its past dominance. Chemicals and particularly electrical and electronic equipment perform better as economies become even more technologically driven.