Despite the contracting economy, Habeck's self-assurance expands.
Robert Habeck, the Federal Minister of Economics, recently confessed to another economic downturn, but he also sees potential positives in the near future. However, this improvement could also be a speeding train hiding in the darkness: The slowing economic growth raises questions about the fragile traffic light budget.
At a press conference, Habeck presented optimistic charts about inflation and salaries to boost the public's morale, having to explain the decline in Germany's GDP for the second consecutive year. These figures suggest that average wages have significantly increased, and inflation nears the European Central Bank's goal of 2%, making the German population "wealthier" during the previous four quarters. Habeck sees reasons for hope in these statistics and considers his past work validated.
As per the German government's projections, the GDP is predicted to contract by 0.2% in this fiscal year. Initially, a growth rate of 0.3% was anticipated in the spring, and the GDP itself had decreased by 0.3% in 2023. However, expect improvements: Habeck's team estimates growth of 1.1% and 1.6% for 2026 and 2027, respectively. "We're making our way out of this, or currently in the process," explains Habeck about the favorable outlook. Nevertheless, the Green politician admits that the leading economic institutes expect growth to be 0.3 percentage points lower in their combined fall forecast for the following two years than the German government.
The enhanced real wages are only becoming evident in the consumer spending habits and the business investment readiness with a delay, explains Habeck the improvements in the growth projections for 2026 and 2027. Consumers currently demonstrate an "unusually strong" savings rate, states Elga Bartsch. The head of the Economic Policy Department in the Federal Ministry of Economics accompanied Habeck to the press conference. "We don't believe that will hold," says Bartsch regarding the persistent unwillingness to spend.
Diminishing impact of growth initiative
Bartsch can explain the reasons behind the more optimistic forecast by the German government for the following two years: The 0.3 percentage point disparity signifies approximately the anticipated boost from the growth initiative in their figures. In July, Habeck, Olaf Scholz, and Christian Lindner approved a stimulus program of approximately 120 separate measures in conjunction with the provisional agreement on the federal budget for 2026. Initially, many experts were caught off guard when Habeck estimated the project's impact at an ambitious 0.5 percentage points of additional growth for 2026. Therefore, the GDP growth should be 1.5%.
Now, his ministry is counting on the impetus effect of 0.3 percentage points and an overall growth of 1.1% the following year. Even the impetus effect of 0.3 percentage points depends on the measures included in the growth package being approved by the Bundestag and, in some cases, the Bundesrat. The ongoing dispute over the 1,000-euro bonus for long-term unemployed who stay in work for a year highlights the uncertainty surrounding this. SPD and FDP blocs are highly critical, while Green Party labor spokesman Frank Bsirske shares skepticism about this aspect of the growth initiative.
"That's an idea that originated from Habeck's office," claims the SPD faction leader Katja Mast defensively on Wednesday morning. A few hours later, Habeck counters: "I still believe in the decisions we've made." The hidden threat: If one measure from the growth package is challenged, all others may easily unravel. Coalition negotiations are a messy blend of demands from all three ruling parties, either gathering approval together or falling apart altogether.
A budget not balanced
The main issue: Whenever the traffic light coalition confronts a fundamental choice, it can only make it through extensive package solutions that Scholz, Habeck, and Lindner work out in grueling all-night sessions. Once this package is introduced in parliament, various factions point out errors and imbalances. This was evident in laws like the heating law, the 2024 budget (keyword: agricultural diesel), the basic security for children, and the budget for 2025... The list continues. The stability of the growth initiative and the anticipated, already revised boost in GDP growth for the German economy wavers. Moreover, the eagerness to support this government at the expense of own principles is diminishing in all three blocs with each new poll.
The economic recession this year and the weaker growth prospects for the following year add complexity for the traffic light coalition: The 2025 budget is tight. In fact, more than 12 billion euros of planned expenditures are uncovered. The federal government plans to further reduce this shortfall to a single-digit billion euro amount. The remaining balance will likely go unused, such as underutilized funding programs. Habeck is hesitant to quantify the impact of the recession on the federal budget upon request. Federal Finance Minister Lindner will present the tax revenue forecast at the end of October.
But here's the deal: Spending for the citizen's income won't shrink as anticipated, but instead, it'll swell. This is due to economic shrinkage putting strain on the job market, causing Habeck to estimate an additional 165,000 unemployment cases. If refugees from Ukraine flee to warmer Germany due to damaged energy facilities in their own country during winter, the situation will become even more unmanageable. In November, the Federal Constitutional Court might strike down the surcharge on top earners' income, which could further complicate things. Additionally, a Trump victory in the US presidential election could increase Germany's share in supporting Ukraine and escalate tensions in the US-China trade war, harming Germany's export industry.
Who Takes Whose Tune?
Habeck notes that half of Germany's economic progress stemmes from exports, indicating a potential recession. The federal government cannot control foreign demand. Habeck also reiterates the end of cheap energy imports from Russia as a second major factor contributing to Germany's economic downturn and expected weak growth. He supports Chancellor Scholz's plans to alleviate companies from energy price burdens, but it's unclear whether the FDP will cooperate. And then there's the question: Where will the funds for indirect electricity price subsidies in the billions come from?
Habeck tries to steer clear of criticizing Germany's economy. At the beginning of his speech, he highlights the strengths of the economic landscape. The government has successfully reduced inflation and energy prices after substantial increases, paving the way for expected growth. He also asserts that certain perspectives are misleading. "We should not mindlessly adopt the narratives of those who wish to see our country lose its power and self-confidence," says Habeck, addressing populist parties and foreign misinformation campaigns. "We must continually ask ourselves whose tune we're dancing to at any given moment."
The varying viewpoints on the recession's cause can be seen in a Bundestag session initiated by the CDU and CSU. The new growth forecasts carry "significant historical repercussions for our nation," states Julia Klöckner, economic policy spokesperson for the Union faction. Habeck, hastily summoned to the plenum by the Federal Press Conference, listens to Klöckner's criticism. "Germany has lost 300,000 industrial jobs recently," Klöckner says. The traffic light policy is "destroying prosperity." The MPs from AfD, BSW, and The Left share similar or even more severe criticisms.
Habeck's explanations of Germany's underlying structural problems, which predate the current government, as well as external factors like the Ukraine war and weak demand from China, are not convincing to the opposition MPs. CDU General Secretary Carsten Linnemann accuses Habeck of "micromanagement," arguing that the economy needs less regulation and lower taxes. Linnemann calls for an "Agenda 2030," while Habeck prefers to stimulate significant investments through a reformed debt brake. On this particular day, Habeck stands relatively alone, garnering support for his overall positive assessment within his own faction.
At the ongoing budget discussions, the CDU and CSU criticize Habeck's economic policies, stating that Germany has lost 300,000 industrial jobs recently and accusing the traffic light policy of "destroying prosperity." In response, Habeck acknowledges external factors like the Ukraine war and weak demand from China as contributing to Germany's economic downturn but emphasizes the need for investment stimulation through a reformed debt brake instead of fewer regulations and lower taxes.
