Germany's economy is growing again, but experts warn of debt and demographics

There is growth, but the mood is grim

Germany's economy has returned to growth, yet the country is gripped by anxiety — that is the picture Deutsche Welle paints from a week in Berlin. At the 2026 Mechanical Engineering Summit, VDMA association president Bertram Kawlath admitted: 'A year ago I said here: we are angry. Today I have to say: we are stunned.' The sector, which for decades was the backbone of German industry, has cut production by roughly 20% since 2018 and is now losing 15,000 jobs every month. Kawlath criticized the government for internal squabbles, lack of reforms, high bureaucracy and tax burden.

Experts' forecast has improved

A reason for cautious optimism came from the autumn report of the Council of Economic Experts, which Chancellor Friedrich Merz received this week: the experts forecast GDP growth of 1.3% in 2026 and 1% in 2027. Earlier in the year they had been noticeably more pessimistic. Council chair Monika Schnitzer explained the revision by the economy recovering from the energy price shock after the war with Iran faster than expected, with the recovery driven by 'unexpectedly strong exports and high government spending.' Merz, who turned 71 on November 11, called this 'encouraging signals' and noted that given the many crises, such a result was not to be taken for granted.

Why 1% is not enough

The improved economic outlook does not erase structural problems. Under Berlin's financial planning, social spending, defense and debt interest will account for 80% of the federal budget. 'In the long run, expected federal revenues will not be enough for the planned spending,' Schnitzer warned. According to her, growing out of the budget trap would require growth rates Germany has not seen in the last 50 years.

Debt and rating in question

The government is finalizing the 2027 budget with spending of over €555 billion: since revenues will fall short, it plans to borrow more than €118 billion, and including special debt funds for infrastructure and the military, new borrowing reaches almost €204 billion. Experts warn: if the current course continues, the debt-to-GDP ratio, which stood at 63.5% at the end of 2025, could rise to 100% by 2040. Germany remains the only G7 country with a AAA rating, and Merz stressed that he wants to preserve that status. Among the council's recommendations are abolishing environmentally harmful tax breaks, including the exemption of diesel fuel from the energy tax, scrapping the so-called 'mothers' pension,' and a possible VAT increase in the medium term.

Betting on productivity

The researchers see the way out in productivity growth: according to the council, within the same industries, Germany's best companies are up to five times more productive than the weakest, and bringing the laggards up to speed would significantly accelerate growth. But innovation needs capital, and here the Ifo Institute for Economic Research records a deficit: for every thousand students near Stanford, about 14 venture-funded startup founders emerge each year, in Cambridge 3.5, and in Munich only 0.5. At the Berlin summit, mechanical engineers demanded lower labor costs — through a longer working week and flexibility in dismissal protection, without cutting wages. A study commissioned by the association from the German Economic Institute showed that extending the working week by just one hour would add 1.5% to real GDP over five years.