German Fiscal Stimulus

Germany is poised to implement a significant fiscal stimulus package aimed at revitalizing its economy and addressing long-standing infrastructure deficits. The German economy has been struggling in recent years and faces continued challenges in 2025:

• Germany experienced a GDP contraction of 0.3% in 2023 and 0.2% in 2024.

• The economy has been largely stagnant since Q4 2019, with real GDP unchanged over that period.

• The German government recently slashed its 2025 GDP growth forecast from 1.1% to just 0.3%.

• Goldman Sachs Research forecasts 0.3% growth for Germany in 2025, lagging behind projections of 0.8% for the eurozone and 1.2% for the UK.

• The Roland Berger Institute projects a modest 0.4% GDP growth for 2025, placing Germany behind other G20 nations.

• The unemployment rate rose to 6.2% in February 2025, the highest level since October 2020.

• Only one in eight German companies anticipates "somewhat favorable" prospects for 2025. One in three companies expects "somewhat unfavorable" developments, with concerns particularly pronounced in the retail and construction sectors.

• Key Challenges

  • High energy costs and administrative burdens.

  • Growing global protectionist tendencies, especially uncertainty in trade relations with the US.

  • Increasing competition from China.

  • Political uncertainty following the collapse of the coalition government in late 2024

STIMULUS PACKAGE

The key elements of this stimulus plan include:

€500 Billion Infrastructure Fund

• A special off-budget infrastructure fund totaling €500 billion over the next decade has been proposed.

• This fund aims to invest in various sectors, including transportation, energy, education, and digitalization.

• The construction industry is expected to be a major beneficiary, with companies like Heidelberg Materials, Bilfinger, and Hochtief seeing significant stock price increases.

Debt Brake Reform

• The coalition parties have agreed to amend Germany's constitutionally enshrined "debt brake".

• The proposed changes would exempt defense spending exceeding 1% of GDP from borrowing constraints.

• This reform aims to provide greater fiscal flexibility to address current economic challenges.

Additional Measures

• A "growth package" of 49 concrete measures, including bureaucracy reduction and incentives for workers, has been proposed.

• Plans for a "Deutschlandfonds" to encourage investments, particularly for small and medium-sized enterprises, large corporations, and startups.

• A proposed "non-bureaucratic" investment premium of 10% for all companies.

Economic Impact

• Economists predict that swift implementation of these measures could lead to a significant uptick in growth, potentially reaching rates of 2% in the coming years.

• The stimulus is expected to boost various sectors, including construction, defense, and energy.

• German defense firms like Rheinmetall, Hensoldt, and Renk have already seen substantial increases in their stock prices due to the proposed changes.

This fiscal stimulus represents a major shift in German economic policy, moving away from the traditionally conservative approach to a more expansive stance aimed at addressing structural weaknesses and boosting economic growth

Key Impacts on Bond Yields

1. Rising German Bund Yields:

   • The yield on Germany's 10-year Bunds surged to 2.86%, marking its largest weekly increase since the 1990s, with a 30-basis-point jump in a single day following the announcement. This is the highest level seen in nearly three years.

     

   • Goldman Sachs projects that 10-year Bund yields could climb further, potentially reaching 3.75%, levels not seen since 2008.

2. Global Bond Market Ripple Effects:

   • German Bunds, considered a benchmark for eurozone debt, have influenced yields on other European government bonds. For example: