The panel of economists that advises Chancellor Friedrich Merz has almost halved its forecast for German economic growth this year, projecting that gross domestic product will rise just 0.5 per cent in 2026. The council attributed the downgrade to the war in the Middle East and to US trade policy, and warned that inflation would run faster than previously expected, a combination that leaves Europe's largest economy grinding close to stagnation.
The revision lands on an economy already worn down by a prolonged slump. German unemployment passed three million at the start of the year, a twelve-year high, and industrial bellwethers have continued to retrench, with Volkswagen pressing ahead with plans to cut 35,000 jobs. The closure of the Strait of Hormuz and the spike in energy prices that accompanied the Iran war delivered what officials have described as a second energy shock in two years, falling on a manufacturing base still adjusting to the first.
Merz's coalition has responded with the largest fiscal loosening in modern German history. A €500 billion infrastructure fund is meant to rebuild roads, rail, bridges and digital networks over a decade, and defence spending has been lifted toward €83 billion as Berlin rearms. The bet is that public investment can pull the economy out of its rut where private demand has failed to. The advisers' downgrade is, in effect, a warning that the stimulus has not yet outrun the headwinds.
The inflation warning complicates the picture further. A renewed energy shock pushes up costs across an economy that is heavily industrial and energy-intensive, and faster price growth narrows the room for the European Central Bank to support activity. The prospect of weak growth and sticky inflation at the same time is the uncomfortable mix policymakers across the continent have been trying to avoid.
Politically, the numbers are difficult for a chancellor who took office promising to restore German economic confidence. Merz leads a grand coalition of his CDU/CSU bloc with the Social Democrats, and his approval has hovered in the mid-forties. A year of near-zero growth, three million unemployed and rising prices is not the backdrop on which his government hoped to build its case for re-election.
The advisers' report does not foreclose a recovery; much of its pessimism is conditional on the Middle East conflict and the energy disruption persisting. A signed US-Iran framework that reopened the Strait of Hormuz and brought energy prices down would relieve one of the two forces dragging on the forecast. But with that deal still unsigned, Berlin is planning for a year in which its half-trillion-euro wager has yet to show up in the growth figures.