The German Council of Economic Experts, popularly known as the Five Wise Men, has noticeably revised upward its projections for Europe’s largest economy. Despite the drag of high energy costs, the body calls on the German Government to adopt "fiscal measures of historic magnitude" in order to deal with the growing pressure on public accounts stemming from increased spending and the widening of the financing deficit.
In the report presented this Wednesday, the panel of experts expects Germany’s gross domestic product (GDP) to advance in 2026 by 1.3%, compared with the 0.5% calculated previously, which would represent the first significant expansion since 2022. For the next year, they anticipate an increase of 1%, two tenths more than estimated in their previous scenario.
According to the document, the growth of the German economy in the current fiscal year will be supported above all by exports and public spending. For 2027, it is expected that consumption, both public and private, along with investment by the public sector, will become the pillars of GDP growth.
At the same time, the wise men expect that the rising cost of energy will continue to push prices upward throughout the forecast horizon. They calculate that average annual inflation will stand at 2.8% in 2026 and at 3.3% next year.
In their assessment, they warn that, despite an improvement in the cycle, "German public finances are subject to growing pressure," since in the medium term the projected spending volume will far exceed the expected revenues.
"It is inevitable to limit the growth of spending in the federal budget," Monika Schnitzer, the head of the Council, has argued, stressing that fiscal consolidation must be designed in a way that does not curb growth and shares the burden in a balanced manner among generations and social groups.
Reforms and fiscal adjustment of historic scope
In this vein, the experts consider "fiscal measures of historic magnitude" essential, after the sharp increase in federal spending since the beginning of the decade, driven by crisis packages, the expansion of the welfare state, and the rise in subsidies.
They also warn that strengthening defense spending and the higher cost of debt interest will add additional pressure on the federal budget in the coming years, raising the debt-to-GDP ratio.
In this scenario, the Council proposes to gradually eliminate, starting in 2031, the exemption of military spending from the ceiling set by the debt brake. It also emphasizes that the path of reducing indebtedness should be explicitly included in the Constitution.
With a funding gap that could be between 2.7% and 4.8% of GDP in 2040, the wise call for a broad consolidation package that combines targeted cuts to subsidies, structural changes in the social security system, and a more efficient tax framework. In their view, the decision on the pace of the gradual withdrawal and the adjustment strategy "should be adopted during this legislative term".
Outlook from the Bundesbank and acceleration by year-end
For its part, the president of the Bundesbank, Joachim Nagel, said this Wednesday in Riga that various institutions, such as the International Monetary Fund (IMF), the main German economic research institutes, and the federal government itself, point to growth close to 1.3% this year and 1.1% in 2027, after a period between 2019 and 2025 that was practically stagnant.
Nagel recalled that Germany was especially vulnerable to disruptions in supply chains during the pandemic and that its high dependence at the time on Russian gas left it highly exposed to the energy-price shock following the invasion of Ukraine.
The central banker added that the traditional German model, based on a strong export industry and the opening of global markets, is under heavy pressure, with companies that have been losing competitiveness and market share in world trade to competition from China.
Nevertheless, he insists that this situation does not amount to a generalized deindustrialization, since the latest data and forecasts show "encouraging" signs of improvement.
In this context, Nagel has indicated that, despite interruptions in transport resulting from the low flow of the Rhine, initial estimates point to economic activity growing by 0.2% in the third quarter, adding that "it is likely that economic growth will accelerate in the fourth quarter".