VW is only one of many Germany companies that are struggling – Image: JENS SCHLUETER/AFP/Getty Images
The war in Iran has dashed hopes for economic growth. Pension and healthcare systems in Germany are also feeling the strain.
It was certainly not a joyful meeting for Chancellor Friedrich Merz: On Wednesday (May 27), the chancellor and several ministers from his cabinet met with the five economics professors who make up the German Council of Economic Experts — an independent advisory body to the federal government.
The Council’s latest report provides no cause for the German government to celebrate. On the contrary, it underscores just how poor the state of the German economy is.
Stagnation rather than growth in Germany
“Unfortunately, we’ve had to lower the growth forecast we gave in this year’s report,” said Chairperson Monika Schnitzer ahead of the meeting at the Chancellery. “We now expect the gross domestic product (GDP) to grow by just 0.5% this year and 0.8% next year.”
The GDP measures the total value of all goods and services produced, and serves as the measure of a country’s economic strength. Meanwhile, the inflation rate — that is, the rise in prices — is expected to climb to 3% in 2026.
These are disastrous figures. In fact, they are the exact opposite of what the chancellor promised as his top priority in May 2025 when his government took office: to quickly get the economy back on track.
Frustration among German companies
Business leaders are voicing their increasing discontent with the government. Leading industry associations are expressing concern that since the end of World War II, Germany’s competitive position in the global economy has never been more precarious.
One in four jobs in Germany is linked to the industrial sector. For decades, German exports of cars, machinery, chemical and pharmaceutical products flourished, and the country prospered as a result. Since the prolonged economic downturn that began in 2019, however, German companies have been losing their global competitive edge, and companies that export goods are openly questioning whether it is possible to turn things around.
The panel of economic experts presented their grim outlook in the German capital Berlin – Image: ABBfoto/picture alliance
Energy prices have risen dramatically
As recently as last fall, there was at least some hope that the economy might finally start to pick up again in 2026. But the war in Iran threw a wrench in those plans. Heating oil prices have risen by 40% and gas and electricity prices are also expected to continue climbing.
Before the Iran war, 20% of global oil and liquefied natural gas consumption was transported through the Strait of Hormuz off the Iranian coast. Just like US President Donald Trump‘s tariff policy, the blockade has been affecting the whole world. The US is by far the world’s largest importer.
“Tariffs and the energy crisis are hitting the German economy particularly hard because it is both an exporter of goods and an importer of fossil fuels,” explained Austrian economist Gabriel Felbermayr, who was recently appointed to the German Council of Economic Experts.
At the same time, there is increasing competitive pressure on global markets, especially from China. In 2025, China increased the volume of goods it exports to Europe once again. Since Europe is the most important market for German exports, Felbermayr said, “this puts a huge strain on German industries both at home and in third-party markets.”
Fewer children and more retirees
The lack of economic growth is also highlighting the underlying structural problems facing Germany. For example, Germany’s rapidly aging population. In the coming years, the postwar baby boomers will reach retirement age.
At the same time, life expectancy is rising, the birth rate has continued to decline, and immigration to Germany is declining. What’s more, as the population ages, the costs of caring for the sick and those in need of long-term care also rise.
In Germany, social security funds are financed by contributions from employees and employers. Currently, contributions account for a good 42% of payroll costs. “Without reforms, the combined rate of contributions for all social insurance programs will rise to over 50% by 2040,” estimates Council Chair Schnitzer.
Spending must be curbed, and earnings stabilized. The Council recommends that the older generation contribute more toward the costs. Overall, Schnitzer said, it is necessary to “make reforms that will also result in real financial burdens.” However, her colleague, Achim Truger, disagrees on account of his concern about creating hardships for the population.
That is precisely why the governing coalition of the conservative Christian Democratic Union (CDU)/Christian Social Union (CSU) and the center-left Social Democrats (SPD) is finding it so difficult to implement reforms. It remains to be seen which of the planned billions in cuts will ultimately be implemented. A proposal to require people without children to pay higher contributions to long-term care insurance has also drawn criticism.
Concerns about the budget
Experts have also been expressing concern about the federal government’s fiscal policy. They say that high levels of debt-financed spending on military buildup and the renovation of Germany’s dilapidated infrastructure will not come without a price. The budget deficit is expected to rise to 3.7% of GDP this year and to 4.3% next year. That is significantly higher than the three percent permitted under the European Union’s stability criteria.
Only an economic upswing could help, and experts do have some suggestions. They believe it is important to focus on technological progress as a driver of economic strength.
But they acknowledge that startups alone won’t be enough, and that German industry needs a fundamental shift in thinking. They say that companies must shift their investments away from the automotive sector and toward high-tech and healthcare sectors, where significant research spending is taking place.
DW.com/NAN 02-05-26
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