German Economic Advisers Slash 2026 Growth Outlook to 0.5%, Warn Social Charges Could Hit 50% of Wages

The Slashed Forecast

The five-member panel, known as the “Wirtschaftsweisen,” delivered a grim assessment on Wednesday after a meeting with Chancellor Friedrich Merz. Gross domestic product will expand by only 0.5% this year, a halving of the 0.9% they had predicted last autumn. For 2027, the council penciled in a mild pick‑up to 0.8%, almost entirely driven by government borrowing.

We unfortunately had to revise our growth forecast downward in our review. We expect gross domestic product growth of only 0.5 percent this year and 0.8 percent next year.

Around 0.3 percentage points of this year’s expansion will flow from deficit‑financed state spending, and a calendar effect adds another 0.2 points. Private investment and consumer spending, in contrast, remain extremely weak. In a risk scenario where energy prices stay elevated far longer than financial markets currently assume, growth would slide to a negligible 0.2%—virtual stagnation.

Energy Shock from the Strait of Hormuz

The primary brake is the Iran War. Hostilities have all but halted shipping through the Strait of Hormuz, through which 20% of the world’s oil and liquefied gas pass. Heating oil has already jumped 40%, and further rises for gas and electricity are expected. High fuel costs are eating into households’ purchasing power and squeezing corporate margins, while the global slowdown crimps exports—a mainstay of German prosperity.

The uncertainty about the duration and effects of the Iran war on the German economy poses a ‘considerable risk’ for the forecast.

Looming Social Crisis

Beyond the cyclical troubles, the council spotlighted a deeper structural threat. Social security contributions currently stand at 42% of gross wages and could climb to 50% by 2040 if no action is taken. Such a burden would cut deeply into disposable incomes, suppress private consumption, and deter business investment—already starved in recent years. The economists reckon that unchecked, this drag could cost up to one percentage point of annual growth by 2035.

Health‑System Reform—Old Ideas, New Urgency

The health system is singled out as the most pressing reform area. Over the past two decades, real spending has ballooned by nearly two‑thirds, yet Germans receive only mediocre outcomes by European standards. The council’s proposals, largely reiterations of long‑debated ideas, include moving away from fee‑for‑service hospital payments, pushing more specialization and outpatient care, capping drug‑price inflation, ending free co‑insurance for low‑earning spouses, and transferring the full cost of non‑insurance benefits to the federal budget.

Government Response and Fragile Outlook

Chancellor Merz, who came to power a year ago vowing an economic turnaround, heard the diagnosis over a working lunch. His government had already halved its own forecast to 0.5% a month earlier. A debt‑financed special infrastructure fund approved by both houses of parliament is meant to provide a fiscal boost, but critics charge that money is disbursed too slowly and is being diverted to patch holes in the regular budget. The council itself projects that the public‑sector deficit will widen from 2.7% of GDP last year to 3.7% in 2026 and 4.3% in 2027.

With unemployment expected to reach 6.4% (almost three million people) and inflation holding at 3% for both 2026 and 2027, the spring report leaves little room for complacency. “We must be prepared to reinvent ourselves,” one article quotes the council’s message, capturing the depth of the challenge now facing Europe’s largest economy.