Iran War Slashes German Growth, Raises Inflation

The primary driver for this revision is the escalating conflict in the Middle East, which is expected to significantly impact energy prices. Ifo now projects 2026 economic growth at 0.8%, down from a pre-war expectation of 1.0%.

Inflation is anticipated to rise to nearly 2.5% if energy prices moderate, or potentially peak at 3% if oil prices remain elevated, which could further slow growth to 0.6%. While Germany exited a three-year recession in 2023, its current recovery is largely fueled by a $1 trillion fiscal stimulus package for infrastructure, net-zero initiatives, and defense spending.

This implies a recovery driven by domestic consumption rather than its traditional export strength, with exports expected to provide limited impetus. The institutes warn that without substantial government spending, the recovery lacks self-sustaining momentum, leaving the economy vulnerable to external shocks.