Goldman Sachs has raised its economic growth forecast for Germany and the broader Euro area for 2025, citing increased military and infrastructure spending as key drivers. The investment bank now projects Germany’s GDP to grow by 0.2%, an upward revision of 0.2 percentage points, while the Euro area’s growth forecast has been adjusted to 0.8%, up by 0.1 percentage point. Goldman also increased its 2026 forecast, expecting Germany’s economy to expand by 1.5% and the Euro area by 1.3%.
Germany’s shift in fiscal policy, which includes plans for a significant increase in defense and infrastructure investments, is expected to have spillover effects on neighboring European economies. Chancellor-in-waiting Friedrich Merz announced that the government would amend the constitution to exempt defense and security expenditures from strict fiscal constraints, allowing for a borrowing surge of nearly €1 trillion. In response, France, Italy, and Spain are expected to raise their defense budgets to 2.9%, 2.8%, and 2.7% of GDP by 2027, respectively. However, Goldman noted that while Germany has more fiscal room, other countries may need to offset increased spending with tax hikes or budget cuts, potentially limiting the broader fiscal boost.
The expected fiscal expansion also affects monetary policy. Goldman Sachs believes the increased government spending will reduce pressure on the European Central Bank (ECB) to implement aggressive interest rate cuts. While the bank still anticipates 25-basis-point cuts in April and June, it no longer expects the ECB to lower rates in July as previously forecasted. The ECB’s benchmark interest rate is now projected to reach 2% by June 2025, with the first 25-basis-point cut bringing the deposit rate to 2.50% at its upcoming monetary policy meeting.