Experts predict recovery of the German economy

A german economy will grow 1.3% this year and 1% in 2027, according to the forecasts of the German Government's Advisory Council of Economists, known as the "five sages", who warn, however, of the increasing pressure on public finances.

“I want to start with the good news. Fortunately, we were able to review the predictions made in the spring. The German economy recovered from the energy shock caused by the war in Ukraine more quickly than expected,” said Council President Monika Schnitzer, in delivering the autumn report to Chancellor Friedrich Merz.

However, it also signaled bad news, after an analysis of public finances which concluded that “the revenues provided in the federal budget will not be sufficient to cover the projected expenditure.”.

This scenario makes it necessary, according to the “wise”, to initiate a consolidation process “planned so as not to harm growth, distributing the burdens between different generations and social groups,” Schnitzer said.

This year, according to the report, recovery was mainly based on exports and public spending.

For next year, it is expected that, in addition to public investments, private consumption will contribute to growth.

However, high energy prices will boost inflation that, according to the “wise”, will reach 2.8% this year and 3.3% next year.

On the other hand, the report notes that public expenditure has expanded since the beginning of this decade, driven by measures to combat specific crises, the expansion of social security systems and high subsidies.

This will add to the increase in defence spending and debt interest over the coming years, which will result in high GDP deficits.

The group of experts proposes the gradual elimination, from 2031, of the exception that they benefit from defense spending in relation to the debt limit (which requires that the deficit does not exceed 0.35% of GDP).

Currently, defense spending that exceeds 1% of GDP is exempt from this rule. Experts propose that this exception be reduced by 0.25% each year.

In addition, experts note, selective cuts of subsidies, structural reforms of the social security system and a more efficient tax framework are needed.

Merz, in receiving the report, said that growth forecasts “bring optimism to businesses and families” and that he shares the conviction that Germany needs sound public finances.

“Germany is the only G7 country that still has the ‘triple A’ classification. I want it to stay that way and in the government, we agree that we have to do everything to keep it going,” he said.