Leading German economic institutes on Wednesday cut their growth forecast for 2026 by more than half to reflect the expected fallout from soaring energy prices caused by the Iran war.
Gross domestic product (GDP) is expected to grow by only 0.6% this year, down from a September forecast of 1.3%, according to figures revealed by five leading think tanks.
The announcement puts another damper on hopes in Berlin for sustained recovery, after the German economy narrowly avoided a third consecutive year of recession in 2025.
The conservative-led administration of Chancellor Friedrich Merz has taken on billions in debt for investments in infrastructure, defence and climate action in a bid to boost growth.
First significant effects of those measures had been expected to make themselves felt this year.
But with the US-Israeli war on Iran expected to severely hamper growth, Germany’s governing parties might face further headwinds in upcoming regional elections later this year, when the far right is expected to make major gains.
“The energy price shock triggered by the Iran war is hitting the recovery hard, but at the same time expansionary fiscal policy is bolstering the domestic economy and preventing a stronger slide,” Timo Wollmershäuser, senior economist at the Munich-based ifo institute said.
Besides ifo, experts from the German Institute for Economic Research, the Kiel Institute for the World Economy, the Leibniz Institute for Economic Research and the Halle Institute for Economic Research were also involved in the forecast.
The institutes are also more pessimistic regarding growth in 2027, revising their forecast to 0.9% from 1.4% predicted last year.
Inflation expected to rise again
Inflation is also expected to rise sharply and could reach 2.8% on average this year, followed by 2.9% in 2027.
“Although this forecast assumes that energy prices will gradually fall again, they will remain noticeably higher than before the outbreak of the war for a lengthy time, meaning companies will pass on the increased energy costs,” ifo said in a statement on the spring forecast.
Surging energy prices due to the Iran war already propelled German inflation to a two-year high in March, with consumer prices climbing 2.7% compared to 1.9% in February, according to preliminary figures released on Monday.
Prior to the war, the institutes had forecast inflation to reach 2% in 2026 and 2.3% in 2027.
The US-Israeli attacks on Iran launched on February 28 have led Iran to effectively block the Strait of Hormuz, a narrow waterway between Iran and Oman that is key for global oil and gas trade.
Commercial shipping in the region has largely come to a standstill, sending oil and gas prices soaring, as it remains uncertain when the war will end and the strait reopen.
A rise in gas prices is expected to make fertilizers more expensive, which will in turn affect food prices, according to the experts.
Higher production and transport costs are also believed to fuel prices for goods across the board.
Labour market also affected
Meanwhile, recovery in the labour market is delayed further by the war, as the weak economy and accelerating structural change have left a clear mark on the labour market, according to the experts.
They only expect a tentative recovery in employment next year, when an improvement for the situation of companies might lead to more willingness to hire.
According to the forecast, the unemployment rate is set to rise from 6.3% last year to 6.4% in 2026.
In March, the number of unemployed in Germany fell by 49,000 compared with the previous month – but remained above the 3-million mark at 3.021 million.
Cuts expected
With no end in sight to the fighting in the Middle East, the German government is also expected to slash its own economic growth forecast next week.
Previous official figures forecast GDP to grow by 1% in 2026.
Slower economic growth could result in lower tax revenues than previously anticipated, which would intensify pressure on the government to make cuts to the core budget.
Finance Minister Lars Klingbeil plans to present the key points of the 2027 budget and the financial planning for the coming years at the end of April, with billion-euro shortfalls to be accounted for.
The government has also announced fundamental reforms to healthcare and pensions to curb state contributions.
Meanwhile, business representatives have long complained about high energy prices, a heavy tax burden and excessive bureaucracy – further issues the government has vowed to address.
Source: dpa
