Merz Advisers Slash German Growth Forecast, See Faster Inflation

Economic advisers to German Chancellor Friedrich Merz have slashed their 2026 growth forecast for Germany nearly in half, while also raising their inflation outlook, according to a report released this week.

The panel of independent experts now expects the German economy to grow by just 0.8% this year, down from a previous estimate of 1.5%. They cited headwinds from the ongoing Middle East conflict and uncertainty over US trade policy, including potential tariffs. At the same time, they see inflation averaging 2.5% in 2026, up from an earlier forecast of 2.0%, as energy costs and supply-chain disruptions persist. This combination of weaker growth and faster inflation — a stagflationary tilt — is particularly challenging for the European Central Bank as it navigates its rate path. For bond traders, the revision reinforces expectations that the ECB may have to keep rates higher for longer to contain price pressures, even as the economy slows. Live rates and charts on NowPrice show how German Bund yields are reacting to the shifting growth-inflation mix.

Markets will now focus on upcoming euro-area inflation data and the ECB's June policy meeting. Any further deterioration in the growth outlook or upside surprises in inflation could prompt a repricing of rate expectations. Traders should also watch for comments from ECB officials regarding the balance between supporting growth and controlling inflation.