UBS sees brighter near-term German outlook after Berlin meetings

Investing.com -- UBS economists see a brighter near-term outlook for Germany following meetings in Berlin with government officials, think tanks and other observers.

Sentiment during the trip was described as “much better than during any of our trips in past years,” with several participants remarking that the new government appears “serious about change” and keen to improve its standing with international investors.

The improved mood comes alongside a large fiscal package focused on defense and infrastructure, aimed at boosting growth over the coming years. Most forecasters have upgraded their GDP projections, with 2025 now expected to see growth above 1%.

UBS’s own forecast is for 1.2% next year, though the bank still sees zero growth in 2024 with upside risk.

Fiscal spending is set to rise through a €500 billion infrastructure fund spread over 12 years and increased defense outlays, both partially exempt from Germany’s debt brake rules.

Despite questions about the feasibility of the near-term ramp-up, UBS noted that “most were confident about a ramp-up in 2026/27, with the focus of investment spending on the railway sector and on digitalisation.”

However, the rollout may proceed more slowly than government plans suggest. The 2025 budget is not expected to be passed until September, and observers voiced skepticism that the proposed rise in the federal deficit to 3.3% of GDP would be reached this year.

UBS maintains its forecast at 2.9%.

Structural challenges remain a concern. While near-term fiscal stimulus is expected to be growth-positive, several interlocutors noted that “growth requires more than just more debt.”

Long-term improvement would depend on additional reforms to encourage investment, boost labor supply, and address demographic pressures. Yet UBS sensed “limited appetite for further reform of the debt brake,” and noted continued political tension within the ruling coalition.

UBS also said inflationary risks were not a focus in the discussions, despite concerns about labor shortages and wage pressures.

Tariffs similarly drew little attention, with one official noting that a 15% effective rate on U.S. exports would shave only around 30bp off GDP.

“Overall, we sense that the outlook for the next two years has clearly brightened, but we heard more scepticism about whether the long-run structural outlook could also improve,” economists led by Felix Huefner wrote.

Despite the push for public investment, opinion polls show that support for the coalition parties has not improved, with the SPD’s leadership suffering its worst internal election result since the 1990s.

Upcoming debates over the 2025 budget and the government’s EU fiscal plan are likely to be key political flashpoints, economists said.