Germany halves 2026 growth outlook as Iran war drives up energy costs

The German government has halved its forecast for economic growth in 2026 to 0.5% as a result of high energy prices due to the war in Iran.

Economy Minister Katherina Reiche on Wednesday presented the new forecast, revising the previous 1% estimate from January, as hopes for a strong recovery for Europe's largest economy this year were dashed.

"The economic recovery expected for this year is once again being held back by external geopolitical shocks," Reiche said.

"The war in Iran is driving up energy and raw material prices," she warned. "This is putting a strain on private households and increasing costs for the German economy."

The government expects growth to reach 0.9% in 2027, but Reiche said the estimate carries "considerable uncertainties" and depends largely on how the conflict in the Middle East unfolds.

The German economy has struggled in recent years to bounce back from the effects of the coronavirus pandemic and the war in Ukraine. Gross domestic product (GDP) advanced by just 0.2% in 2025, narrowly avoiding a third consecutive year of recession.

Chancellor Friedrich Merz's government has promised to revive the country's economic fortunes since taking office last year.

However, oil and gas prices have soared worldwide in recent months due to the conflict in the Middle East and Iran's blockade of the Strait of Hormuz, a key waterway for global fossil fuel supplies.

Inflation quickly rose in many countries, including in Germany, where consumer prices surged by 2.7% in March, up from 1.9% in February, marking their highest level in more than two years.

The International Monetary Fund (IMF) last week lowered its global growth forecasts, warning that "the global economy is threatened with being thrown off course."

By early April, leading German economic institutes had already revised their growth forecasts for 2026 to 0.6%, down from a September forecast of 1.3%.

"The energy price shock triggered by the Iran war is hitting the recovery hard," the five leading think tanks said.

The German government expects an inflation rate of 2.7% this year and 2.8% for 2027.

Reiche does not currently foresee supply bottlenecks for fuels such as kerosene, but has announced countermeasures in the event of a shortage.

The conflict in the Middle East has triggered a "wave of costs" for companies, according to the Association of German Chambers of Industry and Commerce (DIHK).

In a DIHK snap survey of around 2,400 businesses carried out in the first two weeks of April, 83% of companies said they were experiencing negative effects on their operations.

This has further eroded Germany's appeal as a business location for foreign companies, audit and advisory firm KPMG said, citing a survey of 400 German subsidiaries of international firms.

The forecast forms the basis for the next tax estimate in early May. Slower economic growth could lead to lower tax revenues than previously expected, intensifying pressure on the government to make savings in the budget.

Next Wednesday, the Cabinet intends to approve the key figures for the 2027 budget and the financial planning for the coming years.

Reiche is seeking to improve business competitiveness with far-reaching structural reforms.

"We must tackle the tax and social security burden, which is far too high by international standards, reduce energy costs and cut red tape," she said, as the government's forecast sees only weak prospects in the coming years without reforms.