Germany’s economic model is under pressure from multiple structural headwinds. 

The government formed following Sunday’s elections needs to deliver an economic strategy capable of confronting these headwinds.

Many of Germany’s structural challenges can be traced back to relatively slow capital deepening. Restoring competitiveness, then, will mean expanding capital expenditure in both the private and public sector. 

However, the government’s ability to invest is currently limited by the debt brake, a constitutional amendment restricting government deficit spending to 0.35% of GDP.

We think the next government will look to expand public sector investment, as well as increase defence spending, through limited debt brake reform. 

 In addition, the new government might look to boost the supply-side by restarting recently closed nuclear reactors.

 In all, structural headwinds are likely to continue to weigh on growth prospects. But potential growth expectations could be revised higher depending on the next government’s agenda. 

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