GERMANY: Fitch: Pressure On AAA Rating Could Arise Absent Growth Improvements

Fitch Ratings write that although “Germany has substantial fiscal headroom to accommodate the planned major shift to much larger military and infrastructure spending”, pressure on its AAA/Stable rating “could arise over the longer term if this spending increase is not eventually offset by consolidation measures or a lasting improvement in growth prospects”.

• The Bundestag vote on incoming Chacellor Merz’s fiscal reforms is currently ongoing, with the Bundesrat vote due on Friday March 21. Fitch expect the bill to be passed “broadly as envisaged”.
• Fitch pencil in “EUR900 billion-1 trillion (21%-23% of 2024 GDP) of additional government expenditure over the next decade”, with new spending expected to be scaled up gradually.
• “Under this assumption, Germany's debt-to-GDP ratio would approach 70% by 2027, the highest among ‘AAA’ rated peers (median at 36.5%), but still below the 80% peak of 2010. Germany's status as the eurozone’s benchmark issuer and its large, diversified economy also enhance its debt-carrying capacity”.
• “Our initial estimate is that the new spending could directly add on average about 0.4pp to GDP in 2025-2027, but we expect higher US tariffs to offset this in 2025 and forecast growth of just 0.1%”…. “However, fiscal stimulus will allow the German economy to recover modestly next year, when we forecast growth of 1.1%”.
• “Germany faces significant structural challenges, including rising competition from China, tariff risks due to its export-oriented economy, and competitiveness issues in the manufacturing sector caused by increased energy and labour costs, bureaucratic hurdles, and high corporate taxes”… “he additional spending will support growth and enhance competitiveness, but it is unlikely to substantially improve Germany's longer-term growth prospects in isolation”.