Germany’s leading economic institutes have significantly downgraded their economic outlook, citing the Iran conflict and sharply rising energy prices as key factors slowing the country’s recovery. In their joint spring forecast, the institutes now expect economic output to grow by 0.6 percent in 2026 and 0.9 percent in 2027. In autumn, economists had still projected growth of 1.3 percent and 1.4 percent, respectively.
“The energy price shock alone is likely, in our assessment, to reduce the increase in gross domestic product in both years by 0.3 percentage points,” said Timo Wollmershäuser, head of economic forecasting at the Munich-based Ifo Institute, during the presentation of the report in Berlin on Wednesday. The shock is “hitting the recovery hard, while at the same time expansionary fiscal policy is supporting the domestic economy and preventing a sharper downturn.”
The forecast assumes that the Strait of Hormuz, currently effectively blocked by Iran, will become passable again in the second quarter. The assumption is that “energy prices will fall from the summer onward, without, however, returning to pre-war levels,” Wollmershäuser added. The institutes also expect higher inflation. Consumer prices are projected to rise by an average of 2.8 percent this year, increasing to 2.9 percent in 2027. This, in turn, is expected to dampen private consumption.
With regard to energy costs, the researchers advise against government intervention aimed at lowering prices in the short term. “We strongly advise against broad market interventions such as a fuel discount,” said Wollmershäuser. Such measures are costly and benefit many who do not need relief. Moreover, such a discount “distorts the scarcity signal of the price and therefore keeps demand for crude oil high.”
“Targeted transfers would be more appropriate from a social policy perspective,” the researcher continued. “For example, basic income support rates could also be adjusted during the year to reflect higher living costs.” Oliver Holtemöller from the Halle Institute for Economic Research (IWH) emphasized that price signals should be allowed to function.
This also means continuing to rely on emissions trading for CO₂ certificates and not calling the CO₂ price into question. “In the long term, we need the transition of the energy system away from fossil fuels toward alternative sources,” said Holtemöller. Current price shocks show “that this can also make sense for reasons other than environmental concerns.”
The researchers also see structural reasons behind Germany’s economic weakness, including a declining workforce. According to the institutes, potential growth—defined as growth under normal utilization of production capacity—“will come to a standstill in the medium term and is likely to stagnate until the end of the decade.”
“The message of the spring diagnosis by the research institutes is clear: the conflict in the Middle East is increasing the pressure on German policymakers to consistently implement structural reforms,” said Federal Minister for Economic Affairs Katherina Reiche (CDU). “The growth outlook is significantly weaker than previously expected.” She added that “bold reforms” are now needed.
Stefan Kooths of the Kiel Institute for the World Economy stressed that it is important “that an overall consistent approach can be recognized that runs through all reforms.” The researchers recommend strengthening incentives to work and improving conditions for investment and innovation. “Regulatory barriers” should be removed.
Business associations also called for rapid reforms. “There is no shortage of proposals to move the country forward. What matters now is implementation,” said Helena Melnikov, chief executive of the German Chamber of Commerce and Industry (DIHK). There is a need for “decisive reforms that reduce costs, cut bureaucracy and enable investment,” also demanded Dirk Jandura, president of the Federation of German Wholesale, Foreign Trade and Services (BGA).
The spring joint economic diagnosis was prepared by the Halle Institute for Economic Research (IWH), the Ifo Institute in cooperation with the Austrian Institute of Economic Research in Vienna, the Kiel Institute for the World Economy, the German Institute for Economic Research (DIW Berlin), and the RWI Leibniz Institute for Economic Research in Essen.
The report serves as a basis for the German government’s own forecast, which, according to the Ministry for Economic Affairs, is scheduled to be presented on April 22.
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