German government spending may take years to boost growth, Bundesbank says

FRANKFURT (Reuters) -Economic growth in Germany, the euro zone's biggest nation, will be weaker this year than already muted expectations and increased government spending will not significantly raise growth until the end of 2027, the Bundesbank said on Friday.

Once the economic powerhouse of Europe, Germany has been contracting or stagnating for the third straight year now and its recovery keeps getting pushed further into the future as it struggles to overcome structural challenges.

Plans by its new government to sharply increase spending on infrastructure and defence are expected to prop up growth in the longer term but the economy will struggle for now, buffeted by the U.S. administration's global trade war.

"The new U.S. tariffs and uncertainty about future U.S. policy are dampening economic growth for the time being," Bundesbank President Joachim Nagel said. "This has hit German industry at a time when it had begun to stabilise after a long period of weakness.

Exports will fall sharply this year and only increase slightly in 2026, while reduced momentum in industry due to the tariffs will weigh on the labour market and wage growth, the Bundesbank said.

Germany's vast industrial sector has suffered a multi-year recession due to high energy costs, competition from Asia and weak demand for an outdated product range in its oversized car sector.

This weakness will keep the overall economy stagnant this year and growth will only reach 0.7% next year, the Bundesbank said in a biannual update of economic forecasts.

While the 2025 figure is in line with most projections, the 2026 estimate is more pessimistic than figures from either the government or the European Commission, which both saw at least 1%.

Further out, government spending, supported by changes in fiscal rules, should help the economy.

"We expect the additional government spending on defence and infrastructure to significantly increase GDP growth by the end of 2027," Nagel said.

Weak growth will however, continue to dampen consumer price pressures and Germany inflation will ease to 2.2% this year before dipping below the European Central Bank's 2% target in both 2026 and 2027.

(Reporting by Balazs KoranyiEditing by Gareth Jones)