German economic council cuts growth forecast as energy prices bite
By Maria Martinez
Germany's Economic Outlook and Key Challenges
BERLIN, May 27 (Reuters) - The German Council of Economic Experts cut its growth forecast for Europe's largest economy on Wednesday, citing the impact of the Middle East conflict, higher energy prices and U.S. trade policy.
The economists now expect 0.5% growth this year, down from a November forecast of 0.9%, according to their spring report to the government.
For 2027, the panel forecasts growth of 0.8%.
Revised Government Forecasts
Germany's economy ministry cut its growth forecasts for 2026 and 2027 in April and raised its inflation projections. The government now expects 0.5% growth for 2026, down from an earlier projection of 1.0%, and has cut its 2027 growth outlook to 0.9% from 1.3%.
Energy Prices and Consumption Impact
Iran War Taking Its Toll on Consumption
Higher energy prices are reducing household purchasing power and weighing on consumption, the economists said.
Inflation and Risk Scenarios
Inflation is expected to average 3.0% in 2026, up from 2.2% in 2025, before easing to 2.8% in 2027.
In a risk scenario in which oil prices rise to $120 per barrel and remain elevated until October 2026, the advisers said German growth could slow to 0.2% in 2026 and 0.5% in 2027, while inflation would then climb to 3.5% in 2026 and remain at 3.2% in 2027.
External Sector and Industrial Competition
Current Account and Export Sector Challenges
Germany's traditional external strength is weakening: the current account surplus is expected to fall from almost 6% of GDP in 2024 to around 3% in 2027 — a "dramatic deterioration in a very short period of time", said council member Gabriel Felbermayr.
Rising Chinese Competition
Growing competition from Chinese suppliers in Germany's traditional export sectors, such as mechanical engineering, is clearly visible, said Felbermayr. "This places a heavy burden on German industry both at home and in third-party markets.”
Government Response
German Economy Minister Katherina Reiche on Wednesday in Beijing said a modern economic relationship requires both cooperation and competition.
Structural Weaknesses and Reform Pressure
Pressure for the Government to Act is Immense
The council also warned that Germany's long-running economic weakness reflected structural problems, including weaker industrial competitiveness and demographic pressures.
“The weakness of the German economy, which has persisted for seven years, is not only cyclical but also has structural causes,” said Veronika Grimm, another member of the council.
Calls for Reform
The economists called for more reforms to make Germany fit for the future, particularly by curbing social spending and increasing the labour force.
“The pressure to act is immense,” said Monika Schnitzer, chair of the Council of Economic Experts, during the presentation of the report on Wednesday.
(Reporting by Maria Martinez and Klaus Lauer, Editing by Linda Pasquini)
