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The German government has cut its GDP forecasts for the next two years as Europe’s largest economy struggles to rebound from a prolonged period without real growth.

In its latest economic outlook published on Wednesday, the Federal Ministry for Economics predicted that Germany’s GDP would expand by 1 per cent in real terms this year, down from a previous forecast in October of 1.3 per cent.

For 2027, it is predicting 1.3 per cent growth, compared with its October forecast of 1.4 per cent.

The downgrade will add to fears about the strength of Germany’s recovery, despite the government’s €1tn debt-funded investment spree to bolster infrastructure and defence over the next decade.

“Concern is rising whether more expansionary fiscal policy in Germany will be enough to turn sentiment around in the structurally weak economy,” said economists from SEB bank.

Economy minister Katherina Reiche acknowledged on Wednesday that “the expected fiscal policy stimulus did not materialise quite as quickly, nor to the extent, as we had assumed”.

However, she argued there was growing evidence of progress, as she pointed to improvements in industrial production and rising order intake. “There is a realistic chance that the country is on a modest recovery path after years of stagnation.”

Yet even with the historic stimulus, confidence in the private sector remains downbeat. The widely watched Ifo Business Climate index stagnated in January following two months of declines, pouring “cold water on hopes of a stellar rebound for the German economy”, according to ING’s global head of macro Carsten Brzeski.

Despite Wednesday’s downgrade, the government is still more optimistic than Germany’s central bank about the economy’s prospects.

The Bundesbank warned in December that the country has been “clearly in a recession since the end of 2022” and projected 0.9 per cent growth this year, with one-third of that caused by a higher number of working days in 2026.

In 2025, Germany’s economy eked out 0.2 per cent growth, the first expansion since 2022. This was driven by higher consumer and government spending but private-sector investments and exports continued to decline last year.

Many economists still hope that Chancellor Friedrich Merz’s debt-funded investment will kick-start a stronger recovery that could spill over into the private sector. “The German economy is likely to recover significantly this year,” wrote the country’s largest lender Deutsche Bank in a note this week, as it reiterated its forecast of 1.5 per cent growth for 2026.

However, recent government figures on 2025 spending show that Berlin is struggling to implement its investment plans. While federal investment rose by 17 per cent to €87bn, it was almost €29bn lower than originally budgeted.

“By far not all investment funds had been disbursed,” finance minister Lars Klingbeil acknowledged last week, adding that “we need to do better here”.