Germany’s government is targeting economic growth of at least 1% next year as Chancellor Friedrich Merz combines faster business reform with large-scale infrastructure investment in an attempt to revive Europe’s biggest economy.
The target will test whether higher public spending can develop into a broader private-sector recovery after several years of weak industrial output, subdued investment, expensive energy, and pressure on Germany’s export-oriented manufacturers.
Merz and finance minister Lars Klingbeil have linked the growth ambition to accelerated reform and deployment of Germany’s €500bn infrastructure fund. Around €50bn from the programme is expected to contribute to near-term economic activity.
The government has pointed to improving business sentiment and stronger recent economic performance as evidence that conditions may be stabilising after a prolonged period of stagnation.
Germany’s structural difficulties remain substantial. Manufacturers have been dealing with high energy prices, weaker external demand, growing competition from China, labour shortages, and the cost of updating established production systems.
Recent German factory-order data illustrated the uneven position. Orders rose strongly in June, but large individual contracts accounted for much of the gain, while underlying demand remained considerably weaker.
That distinction affects the government’s strategy. Infrastructure projects can provide large contracts for construction, engineering, transport, energy, and equipment providers, but durable economic growth requires demand to spread further through Germany’s business base.
The Mittelstand is particularly sensitive to the industrial cycle. Specialist manufacturers can depend on relatively small groups of customers in automotive, machinery, chemicals, construction, or capital equipment, leaving them exposed when large clients delay spending.
Germany’s infrastructure fund is intended partly to address years of underinvestment in rail, roads, digital networks, energy systems, and public assets. If deployed effectively, that capital can support current economic activity while removing bottlenecks that constrain productivity over longer periods.
Execution is the difficult part. Large public-investment commitments do not create productive infrastructure immediately. Planning, permitting, procurement, construction capacity, skilled labour, and coordination between federal, regional, and municipal government can slow delivery.
Private investment also depends on confidence that those improvements will change operating conditions. Companies deciding where to build a factory or data centre consider power costs, grid access, transport, tax, labour, permitting times, and the reliability of government policy over many years.
Energy remains one of Germany’s most persistent industrial constraints. Manufacturers that use large quantities of electricity or gas face a more difficult cost base than during the era of cheap Russian pipeline gas.
The automotive sector is under a different form of pressure. German groups are investing heavily in electric vehicles, batteries, and software while restructuring domestic factories and competing with Chinese manufacturers that have gained scale quickly.
Chemicals, metals, and other energy-intensive industries face questions over whether future capacity should be built in Germany at all if input costs remain structurally higher than in competing locations.
Merz has also instructed ministers to address Germany’s changing commercial relationship with China. The country remains an important export market, but German industry increasingly competes directly with Chinese businesses in vehicles, machinery, technology, and other high-value sectors.
Fiscal expansion cannot resolve all of those issues. Germany needs productivity gains from faster permitting, digitalisation, energy investment, infrastructure, and management of demographic pressure if higher public spending is to improve the long-term growth rate rather than provide only a temporary boost.
The target of at least 1% growth is modest compared with Germany’s historical performance, but it would represent a material improvement after years in which recession and stagnation dominated the outlook.
A stronger German economy would also support activity elsewhere in Europe. Its manufacturing supply chains span the continent, and additional investment can increase demand for components, professional services, equipment, and raw materials far beyond its borders.
The scale of the infrastructure fund gives Berlin substantial financial capacity. The harder task is converting that commitment into completed projects quickly enough to improve current confidence while making the economy more productive over the decade ahead.
Whether Germany reaches the 1% target will depend on how much private investment follows the public programme. Without that broader response, infrastructure spending can support demand; with it, the programme has a stronger chance of changing the economy’s underlying trajectory.
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