Germany Growth Forecasts Slashed As Mideast War Hits Economy

Germany's economic outlook has darkened significantly, with leading institutes cutting their growth forecast for 2026 to 0.6 per cent from 1.3 per cent in September. The joint projection by major research bodies cites surging energy prices linked to the Middle East war as a key drag on Europe's largest economy. Inflation is now expected to reach 2.8 per cent, up from 2.0 per cent, eroding household purchasing power. Economist Timo Wollmershaeuser of the Ifo institute said the energy shock triggered by the Iran war was undermining recovery, though increased government spending was limiting deeper economic decline.

Oil and gas prices spiked after the US and Israel attacked Iran in late February, killing its supreme leader and triggering regional conflict. Iran responded by closing the Strait of Hormuz to vessels from nations allied with the US and Israel, disrupting a critical global energy corridor. Germany's economy, already weakened by sluggish post-pandemic growth and competition from China in automotive and chemical sectors, faces further strain. Chancellor Friedrich Merz, who took office in May, introduced a multi-year infrastructure fund financed by relaxed debt rules, but critics note much of the spending covers consumption rather than investment.

Economist Oliver Holtemoeller of the Halle Institute for Economic Research said rising consumption spending contradicts the intent behind fiscal rule changes. Long-term prospects are bleak, with institutes citing low productivity, industrial decline and demographic pressures. Wollmershaeuser warned that potential growth could halt by the end of the decade, leading to sustained zero per cent GDP growth. The institutes urge policies to boost employment incentives and ease regulations for investment.