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Olaf Scholz has vowed to boost growth by banishing the “mildew of bureaucracy”, as the German chancellor comes under intense pressure to tackle economic woes that are fuelling support for the far-right.

Scholz on Wednesday called for a “Germany pact” between the government in Berlin, federal states, municipalities and the opposition to re-energise the country amid deep gloom about sluggish economic growth and the slow pace of reform.

“Only together will we shake off the mildew of bureaucracy, risk aversion and despondency that has settled on our country over years and decades,” he said in remarks made to the Bundestag while sporting an eye patch he has worn since falling while jogging over the weekend.

Germany has been engulfed by a wave of national angst in recent months amid warnings from the IMF and OECD that the country will be the slowest growing of the world’s leading economies this year.

The Kiel Institute for the World Economy, one of Germany’s top economic research bodies, blamed “weak industrial activity, the crisis in the construction sector and weak consumer spending” for cutting its forecasts on Wednesday, expecting the German economy would shrink 0.5 per cent this year. That compares with its summer forecast for a contraction of 0.3 per cent. 

Scholz, whose fractious three-way “traffic light” coalition with the Greens and liberal Free Democrats has been suffering from infighting and a slump in the polls, said finding a new national momentum was the only way to defend the country against “those who want to draw political profit from scenarios of decline and panic mongering”.

That was widely seen as a reference to the far-right Alternative for Germany (AfD), which has witnessed a surge in support in recent months, overtaking the chancellor’s Social Democrats (SPD), to reach second place in national polling, after the centre-right opposition Christian Democratic Union.

Uwe Jun, a political scientist at the University of Trier, said that Scholz’s plea for unity was an attempt to show leadership at a time when he was under attack for what critics say is his weak governing style.

“The German economy is not in very good shape, there are lots of fears that a recession will come and also the popularity of the traffic light coalition is very low,” he said.

Jun warned that Scholz faced an uphill struggle given the scale and range of issues facing the country and the difficulties of managing his divided coalition. “It’s good to show that he’s willing to do this,” he said. “But in the political reality, it takes time [and] there are lots of problems.”

Adding to the stream of bad news, orders for German manufacturers fell at the fastest monthly pace since the pandemic hit more than three years ago, although this largely reflected a drop-off in big-ticket items. 

The 11.7 per cent decline in German industrial orders in July was the biggest such fall since April 2020. Excluding big ticket orders worth more than €50mn, industrial orders rose 0.3 per cent in July. Turnover in German industry, however, was down 1 per cent month-on-month in July. 

The leader of the CDU, Friedrich Merz, said the country was “suffocating in bureaucracy” that he said was worsened by the current government, which succeeded Angela Merkel’s “grand coalition” between the CDU and SPD in 2021. 

Scholz rejected the idea of additional stimulus packages to boost the economy, saying that his government was already investing record sums — including tens of billions in support for the green transition and chip production. 

Instead, he promised to revitalise growth by speeding up digitalisation for online government services and e-invoices — areas in which Germany lags behind its EU counterparts — and making it easier to found and grow start-ups.

Wolfgang Lemb, an executive board member at Germany’s largest trade union IG Metall, welcomed Scholz’s remarks as he warned that more than 20,000 additional approvals would have to be issued in the next few years in order to make adaptations to industry and the energy network as part of the country’s ambitious green transition. 

“This cannot be done with the current planning and approval procedure,” he said, speaking at a business event in Berlin. “For the modernisation of Germany, its acceleration and digitalisation is more urgent than ever.” 

He said that Scholz’s promise of more speed was a good one, but added: “Now it has to become concrete.”

Scholz said that his government was also tackling a lack of investment in the state-owned Deutsche Bahn rail network, whose often late-running trains have become a source of national anxiety.

The coalition remained committed to building 400,000 new apartments a year, even though industry figures have warned that they expect only half that number to be constructed in 2023 amid a surge in interest rates and construction costs. Scholz plans to ease the pressure on the sector through a €7bn package of corporate tax relief passed last week, which includes new rules on the depreciation of investment costs for builders.