Edward Conard

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Upside of Inequality Oxford Unintended Consequences

AI Summary. Germany's post-election fiscal proposals mark a change in the country's likely fiscal impulse, prompting forecast upgrades of 0.2 percentage points to 0.2% German growth and 0.1 points to 0.8% Euro area growth. The shift reduces the risk of very weak Euro area growth and very low European Central Bank policy rates.

Dominic Wilson and Kamakshya Trivedi Goldman Sachs
Date Posted:

A Goldman Sachs analysis argues fiscal expansion in Germany may create more balanced growth globally and raise 10-year Bund yields to their pre-crisis range. Stronger German growth may reduce US equities’ outperformance.

Does Germany's fiscal shift raise European growth and interest rate forecasts?

Core argument: Economists raised their 2025 German GDP growth forecast by 0.2pp to 0.2% and their Euro area forecast by 0.1pp to 0.8% following the incoming coalition government's post-election fiscal proposals.

The post-election fiscal proposals from the incoming coalition government represent a sea change in the likely fiscal impulse in Germany. Nothing is simple in Europe, and the details will have an important bearing on the degree to which GDP growth increases in 2025—our economists have raised their German GDP forecast by 0.2pp to 0.2% in 2025 and their Euro area forecast by 0.1pp to 0.8% in 2025. These policy shifts are larger and faster than most pre-election investor/analyst expectations. Given the security imperative it is highly likely that some form of substantial fiscal expansion will be implemented. Germany’s aggressive response to the new security outlook shifts the Overton Window for what is possible in terms of Euro area spending. Taken together, this supports a shift in the distribution of market outcomes in the Euro area—sharply reducing the tail of very poor growth and low ECB policy rates. And while some of the market optimism looks to have run too far relative to likely 2025 real outcomes, they do not look out of line with the potential sustained fiscal shift, which would further open up right tails in European equities, Bund yields and the Euro.

Takeaways by Macro Roundup® AI

  1. Economists raised their 2025 German GDP growth forecast by 0.2pp to 0.2% and their Euro area forecast by 0.1pp to 0.8% following the incoming coalition government's post-election fiscal proposals.
  2. The German fiscal policy shifts are larger and faster than most pre-election investor and analyst expectations, and the security imperative makes some form of substantial fiscal expansion highly likely.
  3. Germany's response to the new security outlook shifts what is considered possible for Euro area spending, sharply reducing the tail of very poor growth and low ECB policy rates, with a sustained fiscal shift potentially opening right tails in European equities, Bund yields and the euro.

Related Articles:

  • German Borrowing Costs Soar By Most Since 1997 on ‘Historic’ Debt Deal — Germany's incoming governing partners agreed to exempt defense spending above 1% of GDP from the constitutional borrowing limit, create a €500bn off-budget vehicle for debt-funded infrastructure, and loosen borrowing rules for states. Goldman Sachs estimated the package could lift German growth to as much as 2%, versus its 0.8% forecast, if approved and implemented quickly.
  • Germany Can Spend Almost €2tn Without Harming Growth, Economists Say — A poll of 28 eurozone economists estimated that Germany could raise its debt from 63% to 86% of GDP over a decade without repercussions for growth, implying about €1.9tn of fiscal space. The calculation assumes German nominal output grows 2% a year, from €4.3tn to €5.4tn.
  • Repatriation Flows — U.S. bond and equity markets are vulnerable to European investors repatriating capital, as fiscal policy shifts in Europe weaken the dollar and redirect global capital flows away from U.S. financial assets. Trade conflict is also prompting Chinese fiscal stimulus and Canadian calls for large-scale spending, raising the potential for disorderly repatriation on multiple fronts.
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