Germany's economy is showing signs of recovery under Chancellor Friedrich Merz, with GDP expected to grow roughly 1 per cent in 2026 and accelerate to 1.3 per cent by 2028, according to Goldman Sachs strategists. Exports rose 2 per cent quarter-on-quarter in Q2 2026, and analysts forecast earnings per share to grow 17 per cent in 2027, about twice the broader European index. Companies such as Siemens Energy and Thyssenkrupp have benefited from the market tailwind.

However, consumer sentiment remains soggy, and traditional manufacturing heartlands like Volkswagen — whose stock fell to a 16-year low and dropped out of the Euro Stoxx 50 — continue to struggle. Investment in infrastructure has been slower than hoped; Panmure Liberum notes that investment in goods, land and equipment was below year-earlier levels at end-July 2026. UBS sees clear signs of increased defence spending and emerging infrastructure activity.

The recovery could be derailed if fractious politics slow structural reforms, such as pension reform, or dampen corporate investment. Merz's advantage over ousted UK Prime Minister Sir Keir Starmer is Germany's fiscal headroom after relaxing the debt brake for defence and infrastructure in 2025, but maintaining momentum is crucial to avoid a similar political fate.