Germany cuts 2026 growth to 0.5%

Germany's Council of Economic Experts, the Sachverständigenrat which advises the federal government, has cut its 2026 growth forecast from 0.9% to 0.5%, a 44% downgrade in six months. After contractions in 2023 and 2024, Europe's largest economy is heading into a fourth year of near-stagnation.

Council chair Monika Schnitzer said Germany is growing at all only because the state is spending on defence and infrastructure. Remove that public spending, and the German economy is contracting.

The €500 billion illusion

In March 2025, Berlin set up a €500 billion special fund for infrastructure and climate investment, divided between federal projects (€300 billion), regional governments (€100 billion), and a climate transformation fund (€100 billion). The borrowing sits outside Germany's debt brake, the constitutional rule that limits annual government borrowing.

The mechanism matters because this was meant to be the great escape from years of underinvestment. But the ifo Institute, one of Germany's leading economic research bodies, found that 95% of the new debt raised through the fund in 2025 did not produce additional investment. The government shifted existing spending from the normal budget into the special fund. Of €24.3 billion available, real investment rose by only €1.3 billion.

ifo chief Clemens Fuest described it as using debt-financed money to plug budget gaps. For countries like Malta, used to hearing German governments preach fiscal discipline to the south, the political irony is obvious. The deeper problem is more serious: Germany has found a way to borrow more without necessarily building more.

Even genuine new money runs into practical limits. The European Commission says Germany lacks the workforce, planning capacity and permitting speed to absorb large investment quickly. The money exists in the accounts. It is not reaching the real economy fast enough.

Energy shock on weakened foundations

The immediate reason for the downgrade is the Iran conflict and the near-total disruption of shipping through the Strait of Hormuz, which has pushed oil and gas prices sharply higher. The council now expects inflation to reach 3.0% in 2026, up from 2.1% in its November forecast.

That shock is landing on an economy already weakened by three changes: the loss of cheap Russian gas after 2022, weaker Chinese demand for German machinery and cars, and the electric vehicle transition reshaping the automotive sector. Germany's export model rested on cheap energy and strong foreign demand for industrial goods. Both supports have weakened.

The demographic wall

The council's strongest warning is about social insurance. Germany's combined payroll contributions, covering pensions, health, unemployment and long-term care, split between employers and workers, already stand at 42.3% of gross wages. Without reform, that rises to 45.4% by 2030 and 49.7% by 2040.

Health insurance is the biggest driver. Spending has risen 64% since 2005, while revenues grew only 31%. As baby boomers retire, pension contributions are projected to climb from 18.6% to 21.8% by 2040. The council estimates that this rising burden would reduce GDP by 0.5-0.9% by 2035.

Council member Veronika Grimm was direct: "The size of the welfare state must match the country's growth. You cannot keep raising social spending when the economy isn't growing."

Why Europe should pay attention

Germany accounts for roughly 29% of eurozone GDP. Its stagnation travels through supply chains and import demand across the bloc. For Malta, this is not a distant German story. It feeds into eurozone interest rates, business confidence, tourism demand from northern Europe, and the wider EU budget argument.

The ECB, the European Central Bank which sets interest rates for all 20 eurozone countries, now faces a difficult trade-off. Board member Isabel Schnabel is pushing for a rate hike on June 11 to contain energy-driven inflation. Germany's economy needs looser conditions, not tighter ones. As Bruegel notes, the ECB cannot design one perfect policy for a stagnating Germany and more resilient southern economies such as Spain at the same time.

Germany's fiscal deficit is projected to widen from 2.7% of GDP in 2025 to 4.3% in 2027, above the EU's 3% ceiling. A country that spent years warning southern Europe about borrowing is now running a larger deficit with little growth to show for it.

The risk is circular. Weak growth increases the deficit. Rising social costs squeeze the budget further. The fiscal stimulus meant to break the pattern is being absorbed by accounting shifts and capacity bottlenecks. Berlin's test is whether borrowed money can be turned into productive investment before the demographic bill arrives.