Staff Reporter

Goldman Sachs has raised its economic growth forecast for Germany this year, driven by expectations of increased military and infrastructure spending. The firm has also revised its growth estimate for the broader Euro area upwards.

Goldman now anticipates a 0.2% growth for Germany, an increase of 0.2 percentage points. In a note released late Wednesday, the brokerage projected that growth in the Euro area will rise by 0.1 percentage point to 0.8%.

Parties negotiating to form Germany’s new government have agreed to pursue changes to fiscal rules, potentially paving the way for nearly €1 trillion in borrowing to support defense and infrastructure initiatives.

“We foresee spillover effects from Germany impacting neighboring countries and expect that the rest of the Euro area will boost military spending more rapidly in response to Germany’s shift,” stated Goldman economists, led by Sven Jari Stehn.

“We believe these spillover effects will be more significant for France, less so for Spain, and moderate for Italy, reflecting anticipated trade flows in defense spending,” Stehn added.

Goldman Sachs anticipates that France, Italy, and Spain will ramp up their defense spending to 2.9%, 2.8%, and 2.7% by 2027, respectively.

However, the brokerage notes that these countries are nearing their fiscal limits and may need to finance some of this increase by reducing other expenditures or raising taxes, which could lead to a smaller overall fiscal boost.

FISCAL LOOSENING COULD EASE ECB PRESSURE

Goldman also pointed out that recent fiscal developments may lessen the pressure on the European Central Bank (ECB) to lower interest rates below neutral levels.

The firm does not expect the central bank to cut interest rates during its July policy meeting, contrary to its earlier prediction of a 25 basis point reduction.

Goldman estimates that the ECB’s benchmark interest rate will reach 2% by June this year, with expectations for a 25 basis point cut to the deposit rate, bringing it down to 2.50%, during the upcoming monetary policy meeting later this Thursday.