Germany's Economic Growth Forecasts Cut Amid Rising Inflation

Germany's leading economic institutes have revised their growth forecasts downward for 2026 and 2027, attributing the changes to the economic impact of the ongoing U.S.-Israeli war on Iran. The joint forecast has been slashed to 0.6% for 2026, down from 1.3%, and to 0.9% for 2027, reduced from 1.4%. This adjustment reflects a broader trend of economic stagnation, exacerbated by surging oil and gas prices, which have been linked to geopolitical tensions in the region. The institutes predict inflation rates will rise to 2.8% in 2026 and 2.9% in 2027, significantly higher than previous estimates of 2.0% and 2.3%, respectively.

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The economic institutes estimate that the spike in energy prices will cost Germany approximately 50 billion euros ($58 billion) over the next two years, as the country faces increased expenses for imported energy. Oliver Holtemoeller from the Halle Institute for Economic Research (IWH) stated, "This shock makes Germany poorer," highlighting the detrimental effects of rising energy costs on the nation's economic recovery. Timo Wollmershaeuser, head of forecasts at the Ifo Institute, noted that while the energy price shock is hindering recovery, expansionary fiscal policies are providing some support to the domestic economy.

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In response to the rising energy prices, Germany's lower house of parliament recently approved initial measures aimed at curbing fuel costs. However, the economic institutes have cautioned against government interventions that might disrupt market signals. They advocate for targeted social compensation measures instead, suggesting adjustments to basic income support rates to reflect the increased cost of living. Holtemoeller emphasized that "relieving everyone does not work, because aggregate national income is lower than it was before the price shock."

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Germany's economic landscape has been further complicated by challenges such as rising competition from China and a declining working-age population. The institutes predict that Germany's potential growth, currently at 0.2%, could stagnate by the end of the decade. Holtemoeller remarked, "You do not have to stimulate growth. Market economies grow on their own if you let them and if people want that." Despite a significant increase in government spending aimed at reviving growth, the institutes warn that industry faces hurdles from a sluggish international business environment and high geopolitical uncertainty.

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While the economic institutes have presented a unified forecast, there is a notable lack of consensus on the effectiveness of government spending initiatives. Some experts argue that the institutional framework must be conducive to enhancing productive potential for the substantial investments to yield positive results.

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• “This shock makes Germany poorer,” — Oliver Holtemoeller, Halle Institute for Economic Research

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• “Relieving everyone does not work, because aggregate national income is lower than it was before the price shock,” — Oliver Holtemoeller, Halle Institute for Economic Research

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• “What matters is whether the institutional framework creates the conditions under which these 500 billion can actually raise productive potential,” — Geraldine Dany-Knedlik, DIW Berlin

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