German Economic Institutes Halve 2026 Growth Forecast Due to Iran War Energy Shock

Germany's leading economic research institutes halved their 2026 growth forecast for the country on April 1, 2026, cutting the projected rise in gross domestic product from 1.3 percent to 0.6 percent, citing an "energy price shock" triggered by the war in Iran. The joint forecast, published on behalf of the federal Ministry of Economics, was prepared by the ifo Institute, the DIW Berlin, the Kiel Institute for the World Economy, the IWH Halle, and the RWI Leibniz Institute for Economic Research Essen. The revision marks a sharp deterioration in the outlook for an economy that had only recently shown tentative signs of recovery. Timo Wollmershäuser, head of forecasting at the ifo Institute, attributed the downgrade directly to the conflict.

„The energy price shock triggered by the Iran war hit the economic recovery hard” — Timo Wollmershäuser via Deutsche Welle

He added that the government's expansive fiscal policy had nonetheless provided a buffer, preventing a sharper contraction.

Germany GDP Growth Forecast Revision: 2026 GDP growth forecast (before: 1.3%, after: 0.6%); 2027 GDP growth forecast (before: 1.4%, after: 0.9%); 2026 inflation forecast (before: 2.0%, after: 2.8%); 2027 inflation forecast (before: 2.3%, after: 2.9%)

Hormuz closure sends energy prices surging across Europe The war, which began on February 28, 2026, with strikes by the United States and Israel on Iran, led to the effective closure of the Strait of Hormuz, a critical bottleneck for international oil and liquefied natural gas transport. According to the institutes, shipping traffic through the strait has practically come to a standstill, and whether or when passage will resume remains uncertain. Higher gas prices have directly increased costs for heating, fuel, and energy-intensive production, while indirectly driving up prices for food and other goods through the cost of fertilizers and transport. Inflation in Germany already reached 2.7 percent in March, up from 1.9 percent in February, according to preliminary data cited by Deutsche Welle — the highest reading since early 2024. The institutes now project average inflation of 2.8 percent for 2026 and 2.9 percent for 2027, compared to pre-war estimates of 2.0 percent and 2.3 percent respectively. In the eurozone more broadly, prices rose 2.5 percent year-on-year in March, up from 1.9 percent in February, putting pressure on the European Central Bank ahead of its late-April policy meeting.

0.6% (GDP growth) — Germany's revised 2026 growth projection

2025-02: 1.9, 2026-03: 2.7, 2026-12: 2.8, 2027-12: 2.9

ECB rate hike expected as price pressures mount The economic institutes expect the ECB to respond to rising inflation with a series of interest rate increases totalling 0.75 percentage points across three steps, which would bring the deposit rate to 2.75 percent by 2027. The ifo index tracking the share of German companies planning to raise prices climbed to 25.3 points in March, its highest level in three years, up from 20.3 points in February, according to Deutsche Welle. Price increase expectations rose most sharply in the industrial sector, where the index jumped from 13 to 20 points, with construction and consumer services also recording significant increases. The institutes warned that rising inflation would suppress household purchasing power and weigh on private consumption. Chancellor Friedrich Merz's government had previously taken on billions of euros in debt to finance investments in infrastructure, defense, and climate action, and the institutes noted that this expansive fiscal policy was supporting the domestic economy and limiting the growth shortfall. Business associations called for further action, with Bertram Brossardt, General Manager of the Association of the Bavarian Economy, arguing that investment alone was insufficient without structural improvements.

„Investments create the basis for future growth of companies. Parallel to this, however, we need a significant improvement in production conditions, meaning less bureaucracy and lower labor and energy costs” — Bertram Brossardt via Bayerischer Rundfunk

Worst-case scenario left unquantified as war drags on The institutes presented a secondary scenario simulating a prolonged conflict in Iran, under which GDP growth in 2026 would fall to just 0.4 percent and to 0.6 percent in 2027, with inflation rising more than half a percentage point above the baseline forecast — pushing it well above three percent. The authors declined to quantify a worst-case scenario, citing the depth of uncertainty around the conflict's duration. The baseline forecast itself rests on the assumption that the situation in Iran will ease during the second quarter of 2026 and could be settled by summer, though the institutes acknowledged this was far from guaranteed. Export-oriented German industry had already been underperforming expectations before the war, weighed down by global trade uncertainty and tariff disputes. The institutes noted that the consequences of the current shock, while serious, remained less severe than those seen during the coronavirus pandemic in 2020 or following Russia's attack on Ukraine in 2022.

Germany has faced prolonged economic stagnation in recent years. In October 2025, ifo head Clemens Fuest warned that Germany had been in a state of economic downturn for many years, describing the situation as "truly dramatic." The country's export-dependent industrial base has been particularly exposed to global trade disruptions and high energy costs. The joint spring forecast published by the leading institutes is a regular advisory document prepared for the federal government and represents a consensus view of Germany's top economic research bodies.

2026 (previous forecast): 1.3, 2026 (revised forecast): 0.6, 2027 (previous forecast): 1.4, 2027 (revised forecast): 0.9