Domestic demand to drive German recovery in 2026, says IMK

BERLIN, ‌Dec 17 (Reuters) - Germany's economy will next year experience ‍its first ‌domestically-driven recovery since reunification, breaking with decades of export-led ⁠growth, a forecast ‌by the Macroeconomic Policy Institute IMK showed on Wednesday.

The institute projected GDP growth of 1.2% in 2026, up from a ⁠meagre 0.1% this year. The recovery will be fuelled by government ​investment and rising private consumption rather than ‌foreign trade, which remains ⁠weak, it said.

Three German economic institutes cut their growth forecasts for Europe's biggest economy last week.

IMK director ​Sebastian Dullien cited U.S. tariffs, weak Chinese demand, and euro appreciation as headwinds constraining Germany's foreign trade.

"After four years of weak growth, the supporting factors ​are now ‍gaining the upper ​hand," Dullien said, pointing to solid wage growth and increased public investment as key drivers.

However, a labour market improvement will lag the recovery. The unemployment rate is forecast to rise to 6.3% in 2025 from 6.0% ⁠in 2024 and remain at that level through 2026.

The government's investment programs are ​projected to push the budget deficit to 3.3% of GDP in 2026, above the euro zone's 3% threshold.

The deficit for 2025 is forecast ‌at 2.5%, according to IMK, still within EU limits.

(Reporting by Maria Martinez and Klaus LauerEditing by Madeline Chambers)