German economy returns to growth, so why is the country still worried?

Is Germany's economy back on the up? The answer to that question depends on your perspective.

At the 2026 Mechanical Engineering Summit in Berlin this week, the mood was sullen. "A year ago, I said here: We are angry. Today I must say: We are stunned," Bertram Kawlath, president of the  Mechanical Engineering Industry Association (VDMA), said in his opening remarks on Tuesday. 

The mechanical and plant engineering sector was the backbone of German industry for decades. It once employed more than a million people; now 15,000 positions are being cut every month. Production has shrunk about 20% since 2018.

Kawlath criticized the federal government's infighting and lack of reform, as well as what the companies consider a continued high bureaucracy and tax burden.

"[We are] stunned by the whitewashing in so many government statements. Stunned by the increasingly visible decline of our country as a business location."

Germany's economy is growing again — a little

German Chancellor Friedrich Merz promised quick reforms and a rapidly noticeable economic upswing when he took office in May 2025. A year and a half later, reality has caught up with him.

Merz's coalition of his conservative Christian Democratic Union (CDU), its Bavarian sister party the Christian Social Union, (CSU), along with the center-left Social Democrats(SPD), keeps running into trouble. In addition, there are crises and wars. The German economy is facing more headwinds than seldom before, Merz said in October at the German Employers' Day conference in Berlin.

Given the circumstances, small successes are even more meaningful. "A heartfelt thanks for the good news you bring," Merz said when he received the autumn report of the Council of Economic Experts in Berlin, which predicted economic growth of 1.3% for 2026 and 1% for 2027.

The economic experts have a German government mandate to independently analyze business activity and make recommendations for economic policy. Earlier this year, they were much more pessimistic.

"The German economy has recovered quicker than expected from the energy price shock sparked by the war in Iran," said Monika Schnitzer, chair of the expert advisory board, explaining the prognosis. "We see a significant economic recovery, driven by surprisingly strong exports and high government spending."

The chancellor, who celebrated his 71st birthday on November 11, spoke of "encouraging signals" in his address. "The economy in Germany is slowly on the rise again. Considering the many crises in Germany, it was not totally expected that we would manage that."

Why 1% growth is not enough

But these improved prospects do not change the long-term problems. An ageing society means the bills for pensions, health and caregiving are constantly rising.

At the same time, the number of working-age people who finance these services is sinking. That puts increasing pressure on the public purse. According to Berlin's financial planning, social welfare costs, defense and interest on debt will account for 80% of the spending in the federal government's budget.

What are the German government's pension, labor reforms?

"We must realize that in the long term the expected revenues in the federal budget will not be enough to cover the planned expenses," Schnitzer warned. The growth rates are far below what is needed to secure the same level of prosperity as previous decades in the long term.

"To grow out of this budgetary predicament, we would need levels of economic growth which we haven't experienced in Germany for the past 50 years," she said.

The government is currently in final deliberations over its 2027 budget; spending upwards of €555 billion ($615 billion) is planned. Because revenue won't be enough to cover it, the government is planning to take on more than €118 billion in new debt. Adding the debt-financed special funds for infrastructure and the military, the new borrowing adds up to almost €204 billion.

Could Germany lose its top rating?

The economic experts have warned that if Germany continues with this path, the debt-to-GDP ratio could rise to 100% by 2040. This ratio indicates how high the national debt is in relation to annual economic output. At the end of 2025, it was 63.5%.

Germany is the only country of the world's leading democratic industrialized nations (G7) to still hold a AAA rating, the best possible credit rating in finance markets. It signals to investors the smallest possible default risk for German government bonds. "I want it to stay that way," Merz emphasized.

Germany under pressure

However, taking on less debt will not be simple. "A reduction in debt-based financing presents policymakers with a consolidation task of historic proportions and will require tough decisions," said Schnitzer. The belt-tightening must, however, be designed to enable growth. Some recommendations include reducing environmentally harmful tax benefits — like the energy tax breaks for diesel fuel.

The so-called "mothers' pension", a pension subsidy for older parents, should be revoked, said the experts. Tax increases could become necessary in the medium term, for example with value-added tax.

"The burden should be shared fairly between generations and societal groups," Schnitzer said.

Merz wants austerity throughout Europe

According to the chancellor, the experts' message has been received. Solid state finances are an issue in Germany but also throughout the European Union. Merz said there needs to be a consolidation course, adding that politicians have a duty to the younger generation. Reforms are needed, especially  when it comes to social security systems.

Young startups — Germany's next tech champions?

Economic researchers are setting their hopes on increasing companies' productivity. Put simply, productivity describes how much a company can generate with its employees, machinery and resources in a set time.

According to the Council of Economic Experts, there is enormous variation even within the same industries. In Germany, the top companies are up to five times as productive as the weakest enterprises.

If the less productive companies caught up, economic growth could increase significantly, it said in the report. "New technologies and business models could drive peak productivity and allow new highly productive companies to develop."

Germany needs startups, venture capital

But innovations need capital. It's here that the Ifo Economic Research Institute sees considerable deficiencies.

New evaluations show that German universities produce significantly fewer successful business startups than their counterparts in the United Kingdom or United States. For example, for every 1,000 students, about 14 venture capital-backed founders emerge from the vicinity of Stanford University each year. In Cambridge, the European leader, it's 3.5. In Munich, by contrast, it's only 0.5.

There continues to be an abundance of inventors and tinkerers in Germany, especially in mechanical engineering. However, the message from the industry summit in Berlin was that for renewed success, labor costs must come down. Suggestions included longer working hours and more flexibility for employers around job protection.

The intention was not to cut employees' wages and salaries. However, a new study by the German Economic Institute commissioned for the German Mechanical Engineering Industry Association showed that extending the working week by an hour alone would increase real gross domestic product by 1.5% in the coming five years.

This article was originally written in German.