Goldman Sachs raised its economic growth expectations for Germany and the eurozone in 2025 on Wednesday (March 5), mainly due to increased military and infrastructure spending. The new German government plans to relax fiscal regulations and borrow nearly 1 trillion euros to support defense and infrastructure. This measure will not only boost the German economy, but may also have spillover effects on other countries in the eurozone. However, Goldman Sachs also pointed out that other countries may face pressure to cut spending or raise taxes due to limited fiscal space, thereby limiting the effectiveness of fiscal stimulus.

1. German economic growth forecast raised

Goldman Sachs has raised its economic growth forecast for Germany in 2025 by 0.2 percentage points to 0.2%. This adjustment is mainly based on the new German government's plan to significantly increase defense and infrastructure spending by borrowing nearly 1 trillion euros. This fiscal expansion plan is expected to directly stimulate domestic demand in Germany and provide new impetus for economic growth.

2. Eurozone economic growth expectations raised

Goldman Sachs also raised its economic growth forecast for the Eurozone in 2025 by 0.1 percentage points to 0.8%. The Goldman Sachs analyst team pointed out that Germany's fiscal expansion will have spillover effects on neighboring countries, and it is expected that countries such as France, Italy, and Spain will accelerate their military spending in response to Germany's transformation. By 2027, the proportion of defense spending to GDP in these countries is expected to increase to 2.9%, 2.8%, and 2.7%, respectively.

3. Fiscal constraints and policy impacts

Although Germany's fiscal expansion plan has provided support for economic growth, Goldman Sachs points out that other countries in the eurozone are approaching their fiscal limits and may have to fund additional spending through spending cuts or tax increases. This will limit the overall effectiveness of fiscal stimulus. In addition, Goldman Sachs believes that Germany's fiscal expansion has reduced the pressure on the European Central Bank to lower interest rates below neutral levels, and it is expected that the ECB will not cut interest rates at its July policy meeting, compared to the previous forecast of a 25 basis point rate cut.

4. European Central Bank Policy Outlook

Goldman Sachs predicts that the European Central Bank's benchmark interest rate will reach 2% by June this year, and expects to lower the deposit rate by 25 basis points to 2.50% at Thursday's monetary policy meeting. This adjustment reflects the European Central Bank's consideration of balancing economic growth and inflationary pressures.

summarize

Goldman Sachs has raised its economic growth expectations for Germany and the eurozone, marking military and infrastructure spending as new engines driving economic recovery. However, other countries in the eurozone may face pressure to cut spending or raise taxes due to limited fiscal space, thereby limiting the effectiveness of fiscal stimulus. In the future, the economic growth of Germany and the eurozone will depend on the effectiveness of fiscal policy implementation and monetary policy adjustments by the European Central Bank. This series of changes will not only affect the European economic landscape, but may also have profound impacts on the global market.

Goldman Sachs has raised its economic growth expectations for Germany and the eurozone, indicating increased market confidence in the recovery of the European economy. This optimistic sentiment may boost the euro in the short term, as improved economic growth expectations typically attract capital inflows to support the exchange rate.