German economists disappointed by Merz government's slow reforms, survey shows

German economists, as surveyed by the Ifo institute, largely rate Chancellor Friedrich Merz's government negatively (42%), primarily criticizing its slow pace on structural reforms, particularly regarding pension costs and the lack of retirement age increases. While acknowledging short-term economic boosts from a €500 billion public investment fund and corporate tax cuts, with 50% expecting immediate positive impacts, economists remain skeptical about medium-term growth prospects. This suggests that despite short-term stimulus, the government's policies are seen as insufficient to address long-term sustainable growth for Germany's anemic economy.

Analysis

An Ifo institute survey of German economists reveals significant apprehension regarding the new government's economic strategy, creating a dichotomy between short-term fiscal stimulus and long-term structural weakness. A plurality of economists, 42% of 170 surveyed, rates the government's initial economic policies negatively, citing a critical lack of structural reforms. The primary concern is the failure to address rising pension costs, with specific criticism aimed at the expansion of the 'mothers' pension' and the absence of an increase in the retirement age. While these measures are seen as detrimental to long-term fiscal sustainability, the government's €500 billion infrastructure fund, improved corporate depreciation options, and planned tax cuts are viewed positively. This leads to a split outlook: half of the respondents expect a positive short-term economic impact, but skepticism prevails for the medium term, where only 34% are positive versus 26% negative. This suggests that while current fiscal spending may temporarily lift Germany's anemic economy from a potential third year of contraction, the lack of market-oriented reforms poses a substantial risk to sustainable, long-term growth.

Key Decisions for Investors

• Investors should differentiate between short-term cyclical opportunities in sectors like infrastructure that may benefit from the government's €500 billion spending program, and a more cautious long-term stance on the German economy pending structural reforms.
• Monitor future government policy announcements closely, as any credible move towards pension reform or raising the retirement age would be a significant positive catalyst for Germany's long-term growth prospects and sovereign credit outlook.
• Consider hedging long-duration exposure to the German market, as the current policy mix of increased spending without structural reform could lead to fiscal strain and weigh on the country's medium-term economic performance.