Germany Sleepwalking Into Stagnation: Merz's Economic Rebound Fades as Growth Forecasts Slashed

The Rebound That Wasn't

When Friedrich Merz was sworn in as German Chancellor in early 2025, there was palpable optimism in Berlin's business community. After years of stagnation under the Scholz coalition — plagued by energy shock aftershocks, the collapse of the German industrial model, and political paralysis — Merz promised a decisive break: deregulation, investment-friendly reforms, and a restoration of Germany's economic dynamism.

A year into his chancellorship, the rebound has proven elusive. Bloomberg confirmed in late April 2026 that Germany's economic recovery 'already looks feeble,' and Reuters warned bluntly that Germany risks 'sleepwalking into permanent stagnation.' Growth forecasts for 2026 have been slashed from 1.3% to just 0.6% — itself optimistic by some analysts' reckoning. For 2027, the projection is an even more dismal 0.4%.

Energy, Tariffs and Structural Decay

Multiple forces are compounding Germany's economic difficulties simultaneously. The ongoing conflict in West Asia has driven a fresh spike in global oil and gas prices, hammering Germany's energy-intensive industrial sector — chemicals, steel, automotive — that never fully recovered from the original 2022 energy shock following Russia's invasion of Ukraine. German businesses surveyed by DW describe 'deep frustration' with the pace and ambition of government reforms, arguing that Merz has failed to deliver the decisive supply-side transformation the economy needs.

US tariffs under President Trump's trade policy have also struck a blow. Despite a US-EU deal that set a 15% tariff on most EU goods — down from Trump's threatened 30% — the automotive sector faces a punishing 25% levy that has dealt a severe blow to German carmakers, who exported €28 billion worth of vehicles to the US market annually before the tariff escalation.

The EU Responds — But Can It Deliver?

At the European level, the Commission is attempting to address the continent's competitiveness crisis with a major deregulation and market integration push, drawing inspiration from the Draghi Report's stark warnings about Europe's economic trajectory. NextGenerationEU payments have crossed the €400 billion mark, with fresh disbursements to Germany and other member states. But economists warn that structural reform — loosening Europe's rigid labour markets, integrating the EU's fragmented capital markets, and cutting the bureaucratic costs that the Economist describes as having 'unshackled' EU competitiveness — takes years to bear fruit.

For Merz personally, the economic headaches arrive at a difficult political moment. Germany's 'super election year' of state elections from March to September 2026 creates constant political turbulence that makes it harder to push through unpopular but necessary reforms. The far-right AfD, though excluded from coalition arrangements at the federal level, continues to poll strongly — a constant reminder of the political cost of economic discontent.