May Fiscal Monitor: No Changes (Yet)

Research evidence excerpt

May Fiscal Monitor: No Changes (Yet)

UpdateMprojection (+155bp) (see summary of forecasts in Exhibit 11 ). We assess risks as

balanced. Downside risks stem from a slower-than-expected expansion in defence

and infrastructure. On the other side, the large widening in the 1Q26 deficit in the

national accounts points to upside risks. In 2027, we expect a deficit increase of

20bp, below consensus (+30bp) and the Bundesbank (+40bp). A more backloaded

expansion, especially on infrastructure-related borrowing, is an upside risk to our

forecast. Our current growth forecast is unchanged at 0.6%Y in 2026 and 0.9%Y in

2027. For 2026 we expect a growth impulse from the fiscal expansion at 30bp,

down from our initial expectation (50bp) reflecting the slow implementation,

especially in infrastructure.

Exhibit 1: Defence spending year to Exhibit 2: Infrastructure spending is

date is running below target and lower also trending below target but above

than 2025, but an acceleration in 4Q 2025, with potential upside from

could put it on par with our funding drawdown from regions

expectations 90 Infra spending (core budgetallocation;+ special€bn)fund incl. KTF and state

Defence spending (core budget + special fund, 80

incl. Ukraine aid; €bn) 70

100 50

80 40

60 30

40 10

20 0

Realised YTD Projected* Target MSe

0 2025 2026

2025 2026 Source: Ministry of Finance, Morgan Stanley Research

estimates.

Source: Ministry of Finance, Morgan Stanley Research *Based on linear extrapolation of monthly spending YTD

*Based on linear extrapolation of monthly spending YTD

Further details on central government core budget and special funds defence and

infrastructure

Cash deficit wider compared to last year: The central government cash deficit YTD

widened in May to €42bn from €41bn in April.