German economic advisers cut 2026 growth to 0.5% and warn social-insurance costs could near half of pay by 2040

The five economics professors of the German Council of Economic Experts met Chancellor Friedrich Merz and several ministers at the Chancellery on Wednesday, 27 May, and delivered a bleak update. "Unfortunately, we've had to lower the growth forecast we gave in this year's report," chairwoman Monika Schnitzer said. "We now expect the gross domestic product to grow by just 0.5% this year and 0.8% next year." The independent advisory body had projected 0.9% growth in its earlier report; it now also expects inflation to climb to 3.0% in 2026.

The figures are the opposite of what Merz made his top priority when his government took office in May 2025, and weak performance has driven his coalition to record-low approval ratings. Business leaders have grown more vocal: leading industry associations say Germany's competitive position has not been this precarious since the end of World War II. One in four German jobs is linked to the industrial sector, and exporters that long underpinned the country's prosperity in cars, machinery, chemicals and pharmaceuticals have been losing ground since a downturn that began in 2019.

Much of the new shock is external. Heating oil prices have risen 40% and gas and electricity prices are expected to keep climbing, after a war in Iran that has disrupted the Strait of Hormuz, through which 20% of global oil and liquefied-natural-gas consumption passed before the conflict. "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," said Gabriel Felbermayr, an Austrian economist recently appointed to the Council, who added that "every day that passes with the Strait of Hormuz blocked makes the worst-case scenario more likely." He also cited intensifying Chinese competition, noting that China again increased its exports to Europe in 2025, straining German industry at home and in third markets.

The downturn has exposed structural strains. Germany's population is aging as the baby-boom generation retires, life expectancy rises, the birth rate falls and immigration declines, pushing up pension and care costs. Social-insurance contributions already account for about 42% of payroll, and Schnitzer estimated they would exceed 50% by 2040 without reform: "It means less take-home pay. People will be able to consume less, have fewer incentives to work... Labor costs for businesses will rise... The pressure to act is immense." The Council recommended that the older generation contribute more, though member Achim Truger objected over the hardship that would impose. The CDU/CSU-SPD coalition has struggled to agree on cuts, and a plan to charge childless people higher long-term-care contributions has drawn criticism -- the same proposal the Health Ministry advanced a day earlier, and one more flashpoint in a reform fight that days before saw a pension commission deny it was weighing a retirement age of 70.

The advisers also flagged the public finances. Debt-financed spending on military buildup and the renovation of dilapidated infrastructure will carry a cost: the budget deficit is forecast to rise to 3.7% of GDP this year and 4.3% next year, well above the 3% allowed under EU stability rules. The panel argued that only renewed growth could ease the strain, and urged companies to shift investment away from the automotive sector toward high-tech and healthcare, where research spending is concentrated.