DIW slashes German growth forecast to 0.5%, warns recession may hit by summer

Forecast slashed

The German Institute for Economic Research (DIW) has halved its 2026 GDP growth forecast to just 0.5 percent, down from 1.0 percent projected in March. For 2027, the forecast was cut from 1.4 percent to 0.8 percent. The revision comes as the Iran war and the resulting energy price shock drag on the export-heavy economy, with DIW expecting output to contract slightly in both the second and third quarters — a technical recession — before stabilizing toward year-end.

The energy price shock is noticeably slowing the recovery — but we are not experiencing a second 2022/23: The shock is smaller, energy supply is still secure, and Germany is now less dependent on fossil imports than after the start of the Ukraine war.

Inflation and jobs under pressure

Inflation is projected to hit 2.9 percent this year and 3.0 percent in 2027, staying above the European Central Bank’s target. That erodes household purchasing power and clouds the outlook for consumer spending. The unemployment rate is expected to edge up to 6.4 percent in 2026 before dipping back to 6.2 percent the following year.

Industry sounds the alarm

Energy-intensive sectors like chemicals are bearing the brunt. A survey by the German chemical industry association VCI found that more than 80 percent of member firms expect further strain from expensive raw materials and logistics. BASF CEO Markus Kamieth said he remains cautious about the second half of the year, citing inflationary pressure and looming supply-chain disruptions. VCI chief executive Wolfgang Große Entrup added that raw material and transport prices will not fall significantly this year. Separately, Saudi Aramco’s CEO Amin Nasser believes global oil inventories may not normalize until 2027, while Exxon Mobil warns that stockpiles are only weeks away from critical lows that could reignite prices.

Public spending the only lifeline

Any growth this year is attributable solely to government outlays, DIW says. Increased defense spending and the delayed deployment of special funds for infrastructure and climate neutrality are providing modest support. But DIW President Marcel Fratzscher urged the government not to rely on broad measures like the fuel subsidy, calling them expensive, poorly targeted, and a gift to oil companies.

The federal government should not make this mistake a second time and therefore not extend the fuel subsidy beyond June 30.

He recommended instead a targeted energy-cost allowance for low-income households, similar to the one introduced in 2022.