Germany’s Economic Recovery Is Threatened by Demographics and Rising Debt

Growth returns, industry remains wary

The Council of Economic Experts expects Germany’s economy to expand by 1.3% in 2026 and 1% in 2027. Its chair, Monika Schnitzer, said exports and government spending had helped drive a recovery faster than expected after the energy-price shock linked to the war in Iran.

At the 2026 Mechanical Engineering Summit in Berlin, however, industry representatives described a more troubled picture. Bertram Kawlath, president of the VDMA, said the sector was cutting 15,000 jobs each month, while production had fallen about 20% since 2018.

Kawlath blamed government infighting and a lack of reform, alongside what businesses view as burdensome bureaucracy and taxes. Chancellor Friedrich Merz had pledged swift reforms and a noticeable upswing after taking office in May 2025.

Demographics strain public finances

An ageing population is increasing the cost of pensions, health care and caregiving, while the number of working-age people funding those services is declining. That combination is putting growing pressure on government finances.

Berlin’s financial planning indicates social welfare, defense and debt interest will make up 80% of federal spending. Schnitzer warned that expected revenues will not cover planned expenses over the long term. She said the growth needed to resolve the budget strain would exceed what Germany had experienced over the previous 50 years.

Borrowing plans raise debt concerns

The government is completing work on its 2027 budget, which plans spending of more than €555 billion ($615 billion). With revenues falling short, it expects to borrow more than €118 billion in new debt.

Including borrowing through special funds for infrastructure and the military, total new borrowing comes to almost €204 billion. Economic advisers warn that, if this course continues, Germany’s debt-to-GDP ratio could reach 100% by 2040, up from 63.5% at the end of 2025. Germany remains the only G7 country with a AAA credit rating, the highest possible rating in financial markets.

Political headwinds persist

Merz’s coalition brings together the conservative CDU, its Bavarian sister party the CSU, and the center-left SPD. It has faced internal difficulties as crises and wars add to economic pressures. Despite the modest improvement in forecasts, experts say stronger productivity, reforms and sound public finances are needed to protect prosperity for future generations.