Goldman Sachs raised its economic growth forecast for Germany this year, citing the prospect of increased military and infrastructure spending, and also upgraded the growth estimate for the broader Euro area.

Germany’s historic plan to ramp up spending shook European markets on Wednesday, powering equities past their US peers, reviving the euro from the brink of parity with the dollar and consigning German bunds to their worst day since 1990.

Germany's plans to go on its biggest public spending spree in 35 years will likely lead to higher borrowing costs across the euro zone – and that's a good thing.

The two political parties expected to form the next German government have agreed to significantly loosen the country’s constitutional restriction on deficits, enabling 1 trillion euros ($1.08 trillion) or more in new borrowing and spending on defense and infrastructure.

The pound weakened against the euro on Wednesday as traders piled into the common currency after Germany's plan for a massive infrastructure fund and an easing of debt rules to boost spending, though the British currency did gain on the dollar.

Euro area PMIs came out slightly disappointing in February with composite PMI remaining constant at 50.2, contrary to the expected rise to 50.5. The services PMI fell to 50.6 from 51.3, led by a sharp drop in France to 45.3 down from 48.3, marking the steepest fall in activity in nearly 18 months. This sends a negative signal for the French economy, which heavily relies on services, in combination with the decline in employment recorded in 2024Q4. However, outside of France the February PMIs were more positive, with the other large euro area countries remaining above the 50-mark, suggesting that the economy experienced marginal growth in Q1. We expect the slow recovery to continue throughout the year due to lower monetary policy rates and rising real incomes. Meanwhile, inflation concerns in the euro area have continued to ease as disinflation progresses. In February, euro area inflation declined to 2.4% y/y (0.3% m/m s.a.), slightly below expectations, and down from 2.5% in January, attributed to lower energy and services inflation. Core inflation decreased to 2.6% y/y from 2.7%, driven by a decline in services inflation, reflecting weaker momentum in recent months and base effects. The monthly service price increases remained around 0.3% m/m s.a., indicating a persistent pressure, but as wage growth is also declining, we expect momentum to turn lower in coming months. With falling wage growth, services inflation is expected to decline further, potentially pushing core inflation below the 2% target by summer. With core inflation expected bellow below 2% from summer we expect continued rate cuts from the ECB, but we are not as confident of the cut in April following the ECB meeting in March. At the meeting, the ECB decided to cut the policy rates by 25bp, so that the deposit rate now yields 2.50%. The most important part of the decision was its assessment of the restrictiveness of its monetary policy stance. ECB now sees monetary policy is ‘becoming meaningfully less restrictive’, which means they assess the current rate level as closer to the terminal rate than previously. With the high uncertainty around the near-term risks, Lagarde refrained from committing to any policy decision in the upcoming meetings, in fact, it was not clear whether the ECB intends to cut or halt at the upcoming April meeting based on today’s info. This publication has been prepared by Danske Bank for information purposes only. It is not an offer or solicitation of any offer to purchase or sell any financial instrument. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and no liability is accepted for any loss arising from reliance on it. Danske Bank, its affiliates or staff, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives), of any issuer mentioned herein. Danske Bank's research analysts are not permitted to invest in securities under coverage in their research sector. This publication is not intended for private customers in the UK or any person in the US. Danske Bank A/S is regulated by the FSA for the conduct of designated investment business in the UK and is a member of the London Stock Exchange. Copyright () Danske Bank A/S. All rights reserved. This publication is protected by copyright and may not be reproduced in whole or in part without permission. EUR/USD edges higher after registering losses in the previous session trading around 1.0810 during the Asian hours on Friday. The pair gains ground as the US Dollar loses ground, driven by falling Treasury yields as markets anticipate more aggressive Fed rate cuts this year amid US growth concerns. GBP/USD holds little gains after registering losses in the previous session, trading around 1.2880 during the Asian hours on Friday. The pair steadies as traders adopt caution ahead of the US Nonfarm Payrolls report scheduled to be released later in the North American session. Gold price remains confined in a range on Friday as traders keenly await the US NFP release. Rising trade tensions, the risk-off mood, and a weaker USD lend support to the precious metal. Bets for more interest rate cuts by the Fed contribute to limiting losses for the XAU/USD pair. Nonfarm Payrolls are expected to rise by 160K in February, following the 143K increase reported in January. The Unemployment Rate is forecast to remain unchanged at 4%. For years, Europe has been synonymous with slow growth, fiscal austerity, and an overreliance on monetary policy to keep its economic engine running. But a major shift is now underway. Germany, long the poster child of fiscal discipline, is cracking open the purse strings, and the ripple effects could be huge.

The parties hoping to form Germany's next government agreed to create a 500 billion euro infrastructure fund and overhaul borrowing rules, a tectonic spending shift that jolted markets on Wednesday on hopes of reviving Europe's largest economy.

Leaders of the likely incoming coalition government announced plans to reform the debt brake and create a special investment fund.

Germany's conservatives and Social Democrats agreed on increasing defense spending by seeking a loosening of the nation's debt brake. They also proposed a 500 billion euro infrastructure fund. Leaders emphasize the importance of taking decisive steps to tackle upcoming challenges.