EUROPEAN FISCAL: Analyst Caution On Upcoming German Investment Figures

Analyst views for tomorrow's German fiscal announcements (note that these were written ahead of today's media reports):

• Bank of America: "The budget details will matter to understand if our assumption of a backloaded impact on growth is still valid. We work on the assumption of a small uptick in defence spending relative to 2024. On infrastructure, recent news reports suggest the government could use up to €25bn of the infrastructure fund already in 2H25. It remains to be seen if this can be deployed quickly, but it would add some upside risks to our 2025 German growth forecast.
  • "We estimated that the additional net borrowing compared to what was implied from the initial draft budget could increase by €40bn (we previously flagged a €25-60bn range). Part of this could be funded by cash buffers that the Finanzagentur still holds."
• Commerzbank: "it will probably take until 2026 for the additional defence and infrastructure expenditure to become funding relevant"
• Goldman Sachs: Estimate budgeted federal net issuance 2025 at E90-100bln. "actual investment spending will likely fall short of EUR 110bn" [...] On military spending, GS think the timeline envisioned by the German government aims to achieve [the 3.5%/GDP core military spending target] by 2032, implying a 0.2pp per year increase in defence spending, appears plausible.
  • "A second key legislation the government expects to pass before the summer break is a package of energy price reductions. In sum these measures could cost up to EUR 14bn per year. Even if passed before the summer break, we expect these measures to be implemented only once a budget is passed, which is more likely starting January 2026."
  • "We see risks of slower implementation of the fiscal package than we assume, particularly in 2025. This could reduce the fiscal impulse in the near-term and result in a steeper growth profile. That said, even if near-term implementation is slightly slower, more clarity on the path ahead could also result in improved sentiment and a sentiment led boost to growth in 2025."

• JP Morgan: "Although we still expect a significant fiscal shift to begin this year, the numbers will likely have to be interpreted with care. [...] the €110bn [announced 2025 federal investment] is a plan and equivalent plans were close to that in 2024. Hence, a large actual increase in 2025 would require much better delivery this year. [...] We see the German budget deficit widening from 2.8% in 2024 to 3.1% in 2025 and 4.1% in 2026. This assumes that spending on defence and infrastructure begins to step up significantly in 2H25, adding to some election giveaways."

  • "Our own forecast [...] is that the general government deficit begins to widen already in 2025. We forecast a step-up in defence and infrastructure spending by around 0.5%-pt of GDP this year and we assume that state/local deficits also begin to widen to make use of the new 0.35% of GDP allowance within the reformed debt brake. In addition, there are some election giveaways that begin to take effect. This widens the general government deficit in the National Accounts methodology by around €20bn in 2025 to almost €140bn (3.1% of GDP). Linking this to the 2025 federal budget deficit that the government is likely to publish next week in its 2025 Budget and 2025-29 Financial Plan is hard, but something in the €100bn range for 2025 could be consistent with our forecast. It will, however, be important to see the details around this, especially in terms of the assumptions made for defence and infrastructure and how much of the federal deficit reflects transfers to other parts of government that will not present budgets (e.g. state/local)."