Leading economic institutes have more than halved Germany’s growth forecast for 2026, warning that the energy shock triggered by the Middle East war will hit Europe’s largest economy hard.
The joint growth forecast was cut from 1.3% to 0.6%, while inflation is expected to rise from 2.0% to 2.8%, putting pressure on household purchasing power.
Economist Timo Wollmershaeuser of the Ifo Institute explained, “The energy price shock triggered by the Iran war is hitting the recovery hard,” though he noted that increased government spending is preventing a stronger economic slide.
The surge in oil and gas prices follows the US and Israel’s attack on Iran, which killed its supreme leader and led to the closure of the Strait of Hormuz, blocking a major shipping lane that transports around a fifth of global oil and gas.
Germany’s economy, already struggling with fierce Chinese competition in key sectors like automobiles and chemicals, had seen only modest growth since a post-COVID surge in 2022.
Economist Oliver Holtemoeller of the Halle Institute of Economic Research added, “Government expenditure on consumption is rising much more sharply than investment. That was not the idea behind changing the financing rules.”
Looking ahead, the institutes warned of structural challenges, including low productivity, industrial decline, and an ageing population, which could lead to average GDP growth rates approaching zero by the end of the decade.
They recommend that the German government increase incentives for employment and ease regulations to improve conditions for investment and innovation amid these multiple economic transformations.
