The impact of the war in Iran on energy markets is dashing hopes for a German recovery, with Berlin set to cut its growth forecast this year from 1 percent to 0.5 percent.
The expected downgrade would, according to people familiar with the matter, put Europe’s largest economy on the brink of a fourth straight year of de facto stagnation as rising energy prices blunt a €1 trillion debt-driven spending pressure.
“Economic development in Germany noticeably lost momentum in the first quarter against the backdrop of the conflict in the Middle East,” the German Economics Ministry warned earlier this week.
The modest growth forecast for this year will be mainly driven by “the boost from government spending” while private investment, exports and domestic consumption stagnate, a government insider said.
German Chancellor Friedrich Merz warned on Monday that the economy will feel the impact of the US war on Iran “for a long time to come”, as he announced a 1.6 billion euro package of short-term measures to ease rising fuel prices.
“We are in a very difficult economic and political situation, given the large number of crises and wars around the world,” he said.
Commerzbank chief economist Jörg Krämer told the FT that it was “increasingly likely” that 2026 will be “another lost year in terms of growth”. Adjusted for the higher number of working days this year, his updated forecast is only 0.3 percent, compared to 0.4 percent based on the number of working days in 2025. “This is effectively a black zero,” says Krämer.
Although last year saw the first increase in GDP since 2022, activity levels were still below previous levels and barely higher than before the onset of the Covid-19 pandemic in early 2020.
“Stagnation is the new normal,” said Clemens Fuest, head of the Munich-based think tank Ifo. “We have long been accustomed to the expectation that growth will one day resume, but unfortunately this is no longer self-evident.”
Fuest said energy costs are exacerbating deep-seated problems, including a shrinking workforce, limited productivity growth and growing red tape.
Government insiders have expressed concern and, in some cases, a sense of helplessness over the external shocks – first US tariffs and now high energy prices – that are repeatedly derailing plans to revive growth and complicating difficult welfare reforms.
One of them said the problem was not just the persistent uncertainty, but also the sheer unpredictability of global events.
This will weigh on private investment decisions and consumer confidence, they added, with inflation likely to at least temporarily rise above the ECB’s medium-term target of 2 percent.
Before the start of the war against Iran, economists had hoped that Merz’s spending over the next decade to improve Germany’s armed forces and Merz’s ailing infrastructure would spark a broader recovery.
But economists at Goldman Sachs estimate that the increase in government spending will increase GDP by just 0.5 percentage points this year.
The war in Iran has dashed hopes that spending pressures can create a “spirit of optimism” in the private sector that will spark a sustained economic rebound, Goldman economist Sven Jari Stehn told the FT.
The sharp rise in energy prices and economic uncertainty since the start of the war with Iran in late February hit an economy still reeling from the 2022 shock following Russia’s large-scale invasion of Ukraine, Fuest said. “Germany’s energy-intensive industry is still weakened by the previous tensions,” he said.
Production in the chemical and pharmaceutical industries – one of the backbones of German industry – has fallen to levels seen at the end of 2004 and has been sidelined for the past three years, Bundesbank data show.
“The situation is serious and has not improved since the start of the war in the Middle East,” Henrik Meincke, chief economist at the German Chemical Industry Association, told the FT. “Companies are already closing production locations because they are struggling with low occupancy rates and high margin pressure.”
In the first quarter, insolvencies in Germany shot up to their highest level in more than two decades, surpassing the level of the 2009 global financial crisis. On a seasonally adjusted basis, the number of unemployed has risen in 41 of the past 46 months and is 30 percent higher than before the start of the pandemic in early 2020.
Not all economists have written off 2026 completely. “If the government can deliver on its fiscal package, the stimulus will be so large that it will be reflected in higher consumption and employment,” said Christian Schulz, chief economist at Allianz Global Investors.
Data visualization by Janina Conboye
