The recently launched Deutschlandfonds is a flagship project of the government to mobilise private investment in targeted sectors. The government will provide around EUR 30 bn, mostly in the form of guarantees, with a goal of stimulating total investments of around EUR 130 bn. The fund brings together existing and new investment promotion programmes that cater to startups, manufacturing companies, and the utility sector. It is a welcome booster for private investment and will help to close existing financing gaps. Nevertheless, structural reforms remain key to reinvigorate investments across all industries.

Following the loosening of the debt brake this spring, the government has unveiled an ambitious spending agenda aimed at revitalizing aging infrastructure and bolstering national defense. Two critical questions emerge: can this plan be executed as rapidly as promised, and will it deliver lasting positive effects on Germany's growth potential? A preliminary reality check suggests that while fiscal expansion will be delayed in 2025, it is likely to gain traction from 2026. However, even then, the general government deficit, estimated at 3.5% of GDP, is unlikely to reach the higher levels predicted by the government. Moreover, while the fiscal stimulus is likely to provide a short-term "sugar rush”, its impact on potential growth might be limited. Despite the loosened debt brake, a substantial financing gap looms as early as 2027, potentially turning the 2027 federal budget negotiations into another test for government cohesion.

Following the loosening of the debt brake this spring, the government has unveiled an ambitious spending agenda aimed at revitalizing aging infrastructure and bolstering national defense. Two critical questions emerge: can this plan be executed as rapidly as promised, and will it deliver lasting positive effects on Germany's growth potential? A preliminary reality check suggests that while fiscal expansion will be delayed in 2025, it is likely to gain traction from 2026. However, even then, the general government deficit, estimated at 3.5% of GDP, is unlikely to reach the higher levels predicted by the government. Moreover, while the fiscal stimulus is likely to provide a short-term "sugar rush”, its impact on potential growth might be limited. Despite the loosened debt brake, a substantial financing gap looms as early as 2027, potentially turning the 2027 federal budget negotiations into another test for government cohesion.

The German government has agreed to introduce an industrial electricity price starting in 2026. The target price is to be 5 cents per kilowatt-hour for half of the electricity consumption and will be limited to the years 2026 to 2028. It is positive to note that the federal government is addressing the problem of Germany's high electricity prices compared to international standards. However, we are skeptical whether the planned subsidized electricity price will actually lead to a structurally better competitive position for the favored industries in Germany.

The intra-European air transport sector has fully recovered from the Covid-19 pandemic, with the number of available seats reaching a new record high in the first half of 2025. However, this recovery is regionally uneven, with Germany lagging significantly behind the European average. A key reason for this disparity is the increase in location-specific costs at German airports.

Germany’s trade deficit with China has been growing and will likely reach a record level of over 2% of GDP this year. At the same time, Chinese export restrictions for on certain chips and several raw materials threaten German supply chains. Against this backdrop the German government is currently working on a new China action plan. In this note we first discuss three key themes defining the evolving relationship with China. We then outline our own thoughts on how to be best cope with the potential “China shock” and existing asymmetric dependencies.

In the first half of this year, investors seemed to reassess their global allocations in light of surging economic policy uncertainty in the US. US stock markets underperformed their European counterparts, and the dollar weakened substantially versus the euro. Market participants suspected a degree of capital flight from the US. However, there has not been a significant redirection of capital from the US towards Europe so far. The slowdown in flows to the US across direct investment, portfolio investment and other investment was not unusual. Instead, the main driver of dollar weakness was probably the increased hedging of foreigners’ dollar positions.

With the parliamentary approval of the 2025 federal budget, Germany’s fiscal expansion is now about to go “live”. In this research note we lay out where the federal government plans to ramp up spending by the year-end, and project where federal spending may actually land. While the federal government plans around EUR 564 bn in total spending for this year, we believe that “only” around EUR 521 bn might be realized, with defense and infrastructure investment spending likely to meaningfully undershoot budget targets due to implementation lags. On our projection, at an estimated 2.2% of GDP, the federal deficit looks set to fall meaningfully short of the government’s own 3.3% deficit target. All in all, the 2025 budget deficit of the general government is unlikely to widen at all at about 2.6% of GDP. In any case, the change in fiscal direction will become apparent in the budget data only next year.