IMF cuts German growth forecast to 0.7% as Iran war keeps energy prices 25% above pre-war levels

Growth downgrades for Germany

Germany’s economy is now expected to expand by just 0.7% this year, the IMF said in its latest World Economic Outlook update. That is 0.1 percentage points less than the April forecast. For 2027 the fund cut its estimate by 0.2 points to 1.0%. The revision aligns with similarly downbeat projections from the German government, its council of economic advisers and the Bundesbank, all of which see only 0.5% growth in 2026. In 2025 Germany eked out a 0.2% expansion, narrowly avoiding a third consecutive year of contraction.

Global and euro-area picture

World output is now seen growing 3.0% in 2026, a 0.1-point downgrade from April, after two years of 3.5% growth. The IMF lifted its 2027 global forecast by 0.2 points to 3.4%, betting on a recovery once the Strait of Hormuz reopens. The eurozone is expected to grow 0.9% this year (down 0.2 points) and 1.2% next year. The United States, China and India remain the main engines of global expansion.

Energy shock and inflation

Energy prices are roughly 25% higher than before the war, the IMF noted. The Strait of Hormuz, a critical chokepoint for oil and gas shipments, has been largely blocked since late February when the US and Israel struck Iran and Tehran retaliated against Israel and Gulf states. A fragile ceasefire and a framework agreement between Washington and Tehran had cooled markets somewhat, but on Tuesday the US reimposed sanctions on Iranian oil, triggering immediate price increases on crude markets.

Energy prices are about 25 percent higher than before the war.

Global headline inflation climbed for a third straight month in May. The IMF now expects consumer prices to rise 4.7% in 2026, up from the 4.4% it projected in April. For 2027 it sees 3.9%, still nearly double the 2% target and 0.2 points above the previous forecast. Central banks in the US and the eurozone are therefore likely to keep policy rates broadly stable; the Federal Reserve last held its benchmark rate at 3.5–3.75%.

Trade, AI and the fragile path ahead

Global trade in goods and services is forecast to grow only 3.5% this year, down from 5% in 2025, before recovering to 4.3% in 2027. The IMF assumes the Strait of Hormuz will become usable again from mid‑July and that pre‑war conditions will be restored by March 2027, though it cautioned that the ceasefire remains fragile after recent mutual attacks.

The global economy has weathered the shock from the war better than feared.

Advances in artificial intelligence are providing a partial offset. The IMF noted that hardware‑exporting countries such as South Korea and Taiwan are recording significant growth jumps thanks to AI model rollouts.