Amid Iran Conflict, Germany's Economy Struggles to Recover
Alongside several cabinet ministers, Chancellor Friedrich Merz met with the German Council of Economic Experts, an independent advisory body to the federal government, on Wednesday (27 May). However, the meeting confirmed the grim state of Europe’s largest economy.
Economic growth stagnates
“Unfortunately, we must lower the growth projections outlined in this year’s report,” said Council chair Monika Schnitzer before the meeting at the Chancellery. “We now project GDP growth of just 0.5% this year and 0.8% next year.” GDP measures a nation’s total output of goods and services, serving as a key economic indicator. Inflation is forecast to reach 3% by 2026.
These figures are concerning, especially as they contradict Merz’s key pledge upon taking office in May 2025 to rapidly revive Germany’s economy.
Industrial sector disappointment
Business leaders are increasingly vocal in expressing dissatisfaction with the government. Leading industry associations state Germany’s global competitiveness is now at its most vulnerable since the end of World War II.
One in four jobs in Germany depends on the industrial sector. For decades, exports of cars, machinery, chemicals, and pharmaceuticals drove Germany’s prosperity. However, since the prolonged economic slowdown began in 2019, German companies have been losing global competitiveness, with exporters openly questioning whether the situation can recover.
Energy prices surge
Until last autumn, there was hope Germany’s economy would recover by 2026. However, the Iran conflict has dashed those hopes. Heating oil prices have surged by 40%, with gas and electricity costs expected to keep rising.
Before the Iran conflict, around 20% of global oil and liquefied natural gas consumption was transported through the Strait of Hormuz off Iran’s coast. Similar to former US President Donald Trump’s tariff policies, disruptions to this route now impact the global economy. The US, the world’s largest importer, is also affected.
“Tariffs and the energy crisis are hitting Germany’s economy hard as it is both an exporter of goods and an importer of fossil fuels,” said Austrian economist Gabriel Felbermayr, recently appointed to the German Council of Economic Experts.
Meanwhile, global competition pressures have intensified, particularly from China. In 2025, China increased its export volumes to Europe.
According to Felbermayr, with Europe as Germany’s main export market, this situation is placing significant pressure on German industry, both domestically and in third-party markets.
Declining birth rates, rising retirements
The lack of economic growth also highlights structural issues in Germany, including a rapidly ageing population. Over the coming years, post-WWII baby boomers will reach retirement age. Meanwhile, life expectancy rises, birth rates fall, and immigration declines. As the population ages, healthcare and elderly care costs rise.
In Germany, social security funds are financed through worker and employer contributions. Currently, these contributions account for over 42% of total labour costs. “Without reform, total social insurance contributions could rise to over 50% by 2040,” Schnitzer said.
Spending must be curbed and government revenue stabilised. The experts recommend older generations bear a larger cost burden. Schnitzer stated Germany needs “reforms with real financial consequences”, but colleague Achim Truger disagreed, fearing such policies would burden citizens.
This ideological divide has made it difficult for the conservative CDU and centre-left SPD coalition government to implement reforms.
It remains unclear which billion-euro spending cuts will be implemented. Proposals to increase care insurance contributions for childless citizens have drawn criticism.
Fiscal concerns
Experts also raised concerns over federal fiscal policies. They warn that increased debt-financed spending to bolster the military and upgrade ageing infrastructure will have significant consequences.
The budget deficit is forecast at 3.7% of GDP this year, rising to 4.3% next year—far exceeding the EU’s 3% stability limit.
The only solution is economic revival. Experts argue technological advancement must drive Germany’s economic strength.
However, they acknowledge startups alone are insufficient. German industry needs a fundamental shift in mindset, redirecting investment from automotive to high-tech and healthcare sectors, which are now hubs for major research.