UBS sees brighter near-term German outlook after Berlin meetings

UBS economists report a significantly brighter near-term economic outlook for Germany, driven by government commitment to change and a substantial fiscal package, including a €500 billion infrastructure fund, leading to upgraded 2025 GDP growth forecasts, with UBS projecting 1.2%. However, despite this immediate stimulus, the long-term structural outlook faces skepticism due to potential delays in fiscal rollout, questions over deficit targets, and limited political appetite for deeper reforms beyond increased debt, amidst ongoing coalition tensions.

Analysis

UBS economists have identified a significant improvement in Germany's near-term economic outlook, noting a sentiment that is "much better" than in previous years, driven by a new government perceived as "serious about change." This optimism is underpinned by a substantial fiscal package, including a €500 billion infrastructure fund allocated over 12 years and increased defense spending, leading most forecasters to upgrade 2025 GDP growth to above 1%, with UBS specifically projecting 1.2%. However, this positive short-term view is tempered by considerable long-term structural concerns and execution risks. While UBS holds a zero-growth forecast for 2024, there is skepticism regarding the implementation speed of the stimulus and whether the federal deficit will reach its 3.3% of GDP target this year. More critically, the report highlights that long-term prosperity requires deeper reforms to boost investment and labor supply, for which there is "limited appetite," particularly concerning the debt brake. Political instability, evidenced by poor polling for the ruling coalition and upcoming budget debates flagged as "key political flashpoints," casts a shadow over the sustainability of the current growth-focused strategy.

Key Decisions for Investors

• Investors could consider tactical exposure to German sectors directly benefiting from the planned fiscal stimulus, such as infrastructure, digitalization, and defense, given the upgraded GDP forecasts for 2025.
• Long-term investors should remain cautious, as the positive fiscal impulse is not yet matched by a credible plan for structural reforms, creating uncertainty about Germany's growth potential beyond the next two years.
• Monitor political developments closely, particularly the 2025 budget negotiations, as coalition tensions and a lack of political capital could delay or dilute the announced investment programs.
• Factor in potential but under-discussed risks such as rising wage pressures and labor shortages, which could introduce inflationary headwinds not fully priced into the current optimistic narrative.