Bank of America has revised up its growth outlook for the German economy, attributing the upgrade to a stronger-than-expected fiscal impulse concentrated around 2026. The bank now forecasts real GDP growth of 1.0% in 2026 - an upward revision of 30 basis points - and 1.7% in 2027, a 10 basis point increase relative to its previous view.
In its updated projections, BofA's economists see activity accelerating to an above-consensus 2.5% quarter-on-quarter annualized pace in the second half of 2026 (2H26). That represents what the team describes as a sharp reversal from the roughly zero average growth experienced over the past six years.
Yet the bank frames this near-term strength as transitory. Led by Evelyn Herrmann, BofA's economist team labels the outlook a fiscal "sugar rush" - a concentrated burst of demand that bolsters growth in the short run but is unlikely to persist. They attribute part of the upgrade to carryover effects from stronger late-2025 data, while assigning the remainder to fiscal measures expected to boost activity in 2026.
Despite the near-term uplift, BofA warns that the acceleration is likely to be short-lived. The team expects activity to slow markedly, with growth dropping back below 1% annualized in the second half of 2027.
One central concern for the bank is the composition of the additional spending. BofA notes that the new outlays are skewed toward consumption-type measures rather than to investment-intensive projects. On average, additional infrastructure spending is forecast to be around €18 billion per year over 2026-28, equivalent to roughly 0.3-0.4% of GDP. The bank stresses this is less than what might have been implied by the broader €500 billion envelope that has been discussed at the federal level.
"Put differently," the economists say, "more than half of the additional total spending across categories at the federal level will be in consumption rather than investment components with higher immediate fiscal multipliers, but very low medium-term growth effects." This framing highlights their expectation that the near-term demand impulse will not translate into sustained medium-term productivity or growth gains.
Within the spending mix, defence stands out as a relatively large and persistent element. BofA assumes defence outlays close to the planned €123 billion in 2026, which would represent a €36 billion year-on-year increase and amount to roughly 0.8% of GDP.
On the activity side, the bank points to signals from factory orders and sector-level data that suggest a growing domestic component to demand. That rising domestic share could help keep growth nearer to 1% rather than slipping back into stagnation, even as the fiscal boost fades.
Shifting to public finances, BofA expects the budget deficit to widen by about 1.5% of GDP this year, taking the deficit to roughly 3.9%. The bank anticipates further increases in the deficit in 2027 as defence-related spending rises and warns that such a path would put debt dynamics on a firmer upward trajectory.
The forecast update also led BofA to adjust its interest-rate and foreign-exchange views. The bank now projects 10-year Bund yields at 3.0% by year-end 2026, raised from a prior view of 2.75%, before drifting down to 2.7% by year-end 2027 as growth softens and the European Central Bank implements two rate cuts to a 1.5% terminal deposit rate in the first half of 2027.
BofA expects range-bound trading through 2026, with yields below 2.9% in the first half of the year and above that level in the second half as stronger 2H26 growth feeds through to markets.
On foreign exchange, the bank ties part of its pro-euro view to Germany's fiscal push and now forecasts EUR/USD at 1.22 by end-2026. The economists say the upward revision to growth strengthens their conviction in the euro at least for the coming year. They also note that the single currency could gain from openness to EU-level reforms and trade deals, while cautioning that the ultimate economic impact depends on the spending composition over the medium term.
Bottom line: BofA expects a meaningful but concentrated fiscal-driven lift to German growth around 2026, accompanied by higher Bund yields and a firmer euro, but anticipates the momentum to fade and growth to normalize below 1% annualized by late 2027.