Iran war expected to dampen German economic recovery

The war in Iran is expected to weigh on the ailing German economy but will not halt growth entirely, a leading economic think tank projected on Thursday.

The longer fighting in the Middle East continues, the stronger the effects on the economy, the Munich-based ifo Institute said in its spring forecast.

Economists also expect the war to temporarily fuel inflation as disruptions to global oil supplies have sent prices soaring.

"Despite the energy price shock, the recovery in Germany is likely to continue in the remainder of this year, particularly because additional government spending on infrastructure, climate neutrality and defence will be expanded and have an increasing impact on demand," ifo deputy director Timo Wollmershäuser said.

Europe's largest economy expanded by 0.2% in 2025, narrowly avoiding a third consecutive year of recession, but a long-awaited return to significant growth remains elusive.

In order to factor in the effects of the war on future economic growth, ifo experts have charted two potential scenarios.

If US-Israeli attacks on Iran and Iranian retaliatory strikes cease soon, meaning "only temporary increases in crude oil and natural gas prices," German gross domestic product (GDP) is expected to grow by 0.8% this year and by 1.2% in 2027.

Without the war, economists would have expected 1% growth in 2026.

Under ifo's "escalation scenario," factoring in "a much longer conflict with a sharper and more persistent rise in energy prices," GDP would grow by only 0.6% in 2026 and 0.8% next year.

Inflation, which currently hovers around the 2% mark, could accelerate to 2.5% under either scenario due to the spike in oil prices, but might spike as high as 3% if the war continues for longer.

However, the institute expects annual inflation to average 2.2% in 2026 under the de-escalation scenario.

Wollmershäuser cautioned that it was currently impossible to predict which scenario was more likely to come true, as the course of the conflict was unclear.