German business outlook unexpectedly falls despite government spending boost

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Germany’s latest economic reports for November have revealed an unexpected decline in business confidence, highlighting the challenges the country faces in overcoming stagnation. The drop occurred even as the government increased spending.

In a report released on Monday, November 24, by the Ifo Institute, the expectations index dropped drastically to 90.6 in November, reflecting a 1.0 decrease from 91.6 in October. 

This decline prompted analysts to conduct a survey, which revealed that several individuals had speculated that there would be no change. Nonetheless, a measure of current condition illustrated a slight increase.

Germany’s economic reports fuel mixed reactions among individuals 

In an attempt to explain this slight increase, Ifo President Clemens Fuest pointed out that firms had begun to become slightly more optimistic about their current situation. However, this does not imply that they are optimistic about a quick recovery, particularly manufacturers that faced a sharp drop in outlook. 

These reports fueled concerns regarding the government’s strategy to stimulate growth by making investments in infrastructure and defense.

Additionally, the information resulted in mixed reactions among individuals. To support this claim, sources mentioned that the Bundesbank and most forecasters predicted growth in the fourth quarter following a turbulent 2025, while some individuals revised their forecasts downwards.

Considering the intense nature of the situation surrounding the country’s economic status, Chancellor Friedrich Merz’s economic advisors recently decided to reduce their growth prediction for next year to below 1%.

According to the advisors, the government should focus its spending on more productive investments. Failure to adapt this strategy, the financial experts warned, could result in the loss of opportunities to address persistent problems and attain sustainable growth.

On the other hand, business surveys released last week from S&P Global demonstrated a significant surge in business activity in November. According to the survey results, business activity continued to escalate in November, whereas in October, it showed sluggish growth. Currently, the manufacturing sector is facing significant challenges, as new orders are declining sharply.

Even with these challenges in place, the European Commission still holds onto the belief that Germany will overcome its long-time stagnation next year. The commission argued that, although exporters face increased pressure from US President Donald Trump’s tariff policies and global market uncertainties, the economy can still flourish from gains derived from increased investments and private spending next year.

Merz urges the government to adopt a new strategy to boost the country’s growth 

In their revised prediction, made public on November 12 in Berlin, the Council of Economic Experts forecast that the country will experience a 0.9% growth in 2026. This forecast is lower compared to their May prediction of 1.0%. 

As expected, reports indicate that these economic advisors adopted a more pessimistic outlook than the government. Notably, the government predicted a 1.3% growth rate next year in October, following a period of very minor growth in 2025.

In an email, the five-member group of economics professors claimed that they chose to lower their prediction after noticing that the current weakness in economic growth resulted not only from temporary factors but also from significant structural changes and geopolitical events that threaten Germany’s export system.

They further elaborated that, “However, this period of weakness isn’t only due to outside influences. Internal issues, like the ongoing drop in the competitiveness of German industries and the aging population, are also playing a role in this tough situation.” 

Meanwhile, sources have declared that it is a lengthy process for government initiatives aimed at enhancing growth, such as large programs funded by debt for infrastructure and military spending, tax cuts, investment incentives, and efforts to reduce bureaucracy, to yield results.

Still, Merz urges the government to take action, acknowledging that the county’s growth has been too low for several years. He made this remark recently at the chancellery with council leader Monika Schnitzer.

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