Germany Announces Large-Scale Budget Investment in Infrastructure and Defense... Investment Institutions Raise Economic Outlook

Establishment of 500 Billion Euro Special Fund for Infrastructure Investment
Concerns Over Rising Debt Ratio and Potential Inflation

As the German political sphere announced plans to invest astronomical budgets in infrastructure and defense sectors, investment institutions have raised their economic growth forecasts.

According to Bloomberg News, Goldman Sachs on the 5th (local time) revised up its forecast for Germany's Gross Domestic Product (GDP) growth rate this year from 0.0% to 0.2%. The forecast for next year was raised from 1.0% to 1.5%.

Goldman Sachs stated, "Other Eurozone countries are also expected to increase defense spending more rapidly in response to Germany's changes," raising this year's Eurozone economic growth forecast by 0.1 percentage points to 0.8%.

Morgan Stanley also expects the German economic growth rate to increase by 0.2 percentage points this year and 0.7 percentage points next year. The German economy recorded a GDP growth rate of -0.3% in 2023 and -0.2% last year, marking a contraction for the first time in 21 years.

The German Christian Democratic Union (CDU) and Christian Social Union (CSU) alliance, negotiating the formation of the next coalition government with the Social Democratic Party (SPD), decided on the 4th to create a special fund of 500 billion euros (781 trillion won) over 10 years to invest in infrastructure. Defense spending is planned to effectively lift the debt limit stipulated in the constitution.

However, experts warn that Germany's debt ratio, which is among the lowest of major countries, could increase significantly, raising the risk of falling into inflation. Friedrich Heinemann of the Centre for European Economic Research (ZEW) forecasted that the debt-to-GDP ratio, currently at 62%, could reach 100% as early as 2034.

German government bonds, considered Europe's safest assets, are plummeting amid expectations of a sharp increase in issuance volume. The 10-year bond yield rose by 31 basis points (1bp = 0.01 percentage points) in a single day on the 5th, reaching 2.79%.

On the 6th, German bond yields continued to rise by around 10 basis points. Goldman Sachs predicted that if the stimulus measures materialize, the 10-year yield could rise to 3.75%.