Germany’s long-awaited fiscal stimulus is finally here — but there’s a defense spending catch, says Goldman Sachs

Germany's huge fiscal expansion is now starting to show up in macro data, and investors are betting it will turbo-charge European growth in the coming months.But defense spending — a cornerstone of the package — could fall short of the ambitious ramp-up this year, a Goldman Sachs note says.The historic fiscal stimulus plan includes a 500 billion euro ($591 billion) off-budget infrastructure investment fund for transport, digital and energy spending, and a defense spending increase of more than 1% of GDP. It's starting to flow through to macroeconomic numbers, Bank of America said this week.BofA analysts highlighted a recent 40% surge in German factory orders on a three-month annualized basis, including bulk orders on heavy machinery, which includes arms and weapons, and electric and electronic equipment. That suggests more orders related to defense, the analysts said.A BofA survey of European fund managers showed a record 74% of survey participants expected growth to accelerate in Europe in the coming months. Almost two-thirds (63%) of those polled named Germany's far-reaching fiscal stimulus package as the main catalyst, cementing the country's status as the "engine of Europe.""Germany continues to be the most preferred equity market in Europe," said BofA analysts, led by Andreas Bruckner, in the Feb. 17 note.But a Goldman Sachs analyst has warned that spending on defense and investment will fall short of the government's budget targets this year.German fiscal policy will "take center stage" this year, contributing to close to half of the 1.1% growth it expects for Germany in 2026, they predicted. Goldman analysis showed Germany's defense budget has surged by 25 billion euros this year to 119 billion euros — a rise of more than 25%. But given the scale of the ramp-up, execution on the ambitious defense budget will fall short of last year's spend, Niklas Garnadt, senior European economist at Goldman, warned in a Feb. 16 note. That said, Garnadt said he still expected the overall defense spend to increase to reach 109 billion euros — some 2.4% of GDP — this year, a hike of 21 billion euros, or almost 0.5% of GDP."Procurement and maintenance account for most of this increase," he said. "Pre-commitments for future procurement and maintenance spending have already increased substantially over the last years and orders for defense-related industries picked up notably in Q4 2025."Germany's locking-in of higher military spending forms part of what investors see as a defense "mega-trend," with sustained, longer-term rearmament driving a broader push towards strategic sovereignty for the continent. Speaking at last week's Munich Security Conference, German Chancellor Friedrich Merz warned that the post-World War Two rules-based order "no longer exists." Germany's Rheinmetall — the continent's largest defense company — is one of several stocks seen as well-placed to capitalize on its growing push for military autonomy.By comparison, spending on the various areas of the infrastructure package — transport, energy and climate, and digital — will also see increases, but budget execution is likely to be mixed, Garnadt said.Overall, total federal spending across Germany's main budget and the three major off-budget funds is predicted to grow from 554 billion euros to 600 billion euros. But Garnadt said spending will likely come in lower than budgeted by the government, predicting it would fall some 33 billion short of the "ambitious" target."While investment in the digitization and climate and energy categories should see lower execution rates, we expect support for hospital investment and loans to social security to be fully executed," Garnadt said."For transport infrastructure — the largest category — we expect execution above 90%," he added.Got a confidential news tip? We want to hear from you.Sign up for free newsletters and get more CNBC delivered to your inboxGet this delivered to your inbox, and more info about our products and services.© 2026 Versant Media, LLC.

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