German fiscal expansion will boost not only local growth

CEE Macro and FI Daily , 19. Mar
German fiscal expansion will boost not only local growth

Germany's parliament passed a historic bill unlocking a record level of state borrowing for defense and infrastructure through amending the country's constitutionally enshrined fiscal rules. The bill would largely release defense spending from the so-called debt brake and set up a fund worth EUR 500 billion (roughly 11% of German GDP) that would be spent on investment in infrastructure. Although it will be spread over several years, the planned measures are a game changer and will give a sizeable push to German growth in the coming years. In our view, the proposed package would lift the path of German GDP upwards (in 2026 by 1% and 2027 by another 0.5% to 1.0%). Such a revision of expectations regarding economic development in Germany would be overall positive for the region as CEE is well integrated in the supply chains. Higher growth is potentially inflationary in nature (especially if combined with potential fiscal impulse within CEE due to activating escape clause) and potentially may limit the space for monetary easing.