The German economy should grow again for the first time in three years this year, but its long-term prospects remain challenging, five leading economic institutes said in a new forecast.

Europe’s largest economy is expected to grow by 0.2 percent this year, before accelerating to 1.3 percent in 2026 and 1.4 percent in 2027, primarily driven by the federal government’s expansionary fiscal policy.  The forecasts are largely unchanged from the institutes’ spring forecast round.

“The German economy is still on shaky ground,” said Geraldine Dany-Knedlik, head of Forecasting and Economic Policy at the German Institute for Economic Research (DIW Berlin). While growth will strengthen over the next two years, she warned that “this momentum will not last,” given persistent structural weaknesses.

Latest survey data suggests that expectations of a near-term pick-up in growth may indeed be optimistic, as both the Ifo Business Climate index and S&P Global’s purchasing managers index showed companies turning more pessimistic about the outlook.

Looking ahead, the institutes warn that the economy is exposed to significant risks. “The trade dispute between the United States and the EU carries considerable potential for escalation, particularly if the EU fails to deliver on its commitments,” they wrote. “In addition, the overall economic impact of the expansionary fiscal policy is difficult to assess and depends heavily on its specific design.”