The war in the Middle East and the resulting rise in oil prices are weighing on the German economy, though leading research institutes say the impact is not enough to derail the recovery entirely.
The Munich-based Ifo Institute estimates that the war will reduce Germany's economic growth by 0.2 percentage points this year. The RWI Leibniz Institute has cut its 2026 growth forecast by 0.1 percentage points to 0.9 percent. "The economic recovery is nonetheless continuing," RWI researchers emphasised.
The Ifo Institute is maintaining its growth forecast of 0.8 percent for the current year, provided the Middle East conflict does not escalate further. "Without the energy price shock, a slight upward revision of the forecast for the current year to 1.0 percent would have resulted," the Munich-based economists said.
The Ifo Institute has also calculated a forecast under an escalation scenario, one in which the Iran war drags on and weighs on global markets. In that case, Germany would see growth of only 0.6 percent this year. Under the same scenario, the Ifo Institute has cut its 2027 growth expectation from 1.2 percent to 0.8 percent.
Rising oil prices are also pushing up consumer prices. "We currently expect the inflation rate to rise to just under 2.5 percent, if oil and gas prices fall again within the next few weeks," said Ifo business cycle chief Timo Wollmershäuser. "However, if prices for fossil energy remain significantly elevated at today's level for a longer period, inflation could peak at just under three percent."
Industry and retail are being hit on two fronts, according to RWI. "Sharply rising energy prices not only make intermediate products and production more expensive in industry," the institute explained. "Consumers are also spending more on petrol, diesel or gas, money that is then missing elsewhere."
Overall, the German economy "embarked on a recovery path at the end of 2025, initiated by increasingly expansionary fiscal policy," the Ifo economists said. The impact of the federal government's special funds, particularly in the defence sector, had even unfolded "somewhat faster" than originally expected. "This recovery is likely to continue in the current and coming year, although it is being dampened by the sharp rise in crude oil and natural gas prices that accompanied the start of the Iran war."
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