The Iran war is destroying hopes of an economic recovery in Germany in 2026. The European Commission also halved its forecast for economic growth in Europe’s largest economy because of soaring energy prices: Brussels only expects Germany to grow by 0.6 percent this year. In the fall, the EU Commission had forecast an increase in gross domestic product of 1.2 percent. Things could get a little better in 2027 with an increase of 0.9 percent.
Brussels joins a series of gloomy prospects. It was only in April that the federal government halved its expectations for the German economy; the coalition only expects mini-growth of 0.5 percent this year. The employer-related German Economic Institute (IW) only expects an increase of 0.4 percent.
Iran war slows the economy
With the Iran war, which began at the end of February, the outlook has clouded over. Economists expect that the German economy, which is dependent on raw material imports, will have to deal with the consequences of the still unresolved dispute in the Middle East for a longer period of time.
Since the Strait of Hormuz, which is important for world trade, is effectively closed, crude oil prices have skyrocketed. Higher energy prices, especially at gas stations, put a strain on consumers and companies, which slows down consumption and investment.
The Bundesbank assumes that the effects of the war in the Middle East will hit the German economy “broader and more noticeably” in the current second quarter. The inflation rate in Germany is therefore likely to remain elevated in the coming months after jumping to 2.9 percent in April. According to the Bundesbank, industry in this country will increasingly feel the effects of higher energy prices, supply bottlenecks and material shortages.
EU particularly vulnerable to energy shock
According to the EU Commission’s assessment, the economy in the European Union will also develop weaker overall than recently expected. Instead of 1.4 percent growth, Brussels only expects an increase of 1.1 percent. For the 21 countries in the Eurozone, the forecast was reduced to 0.9 percent.
The EU Commission writes that moderate growth and a decline in inflation were expected until the start of the Iran war at the end of February. Due to the sharp rise in energy prices, economic activity is losing momentum and inflation is rising.
In addition, rising energy costs put more strain on private households and drove up operating costs for companies. “As a net energy importer, the EU economy is particularly vulnerable to the energy shock caused by the conflict in the Middle East,” notes the EU Commission.
Upswing in 2027?
The Commission expects some improvement next year, provided the situation on the energy markets eases. The duration of the conflict in the Middle East is crucial for further economic development. In any case, the Iran war is not the only burden on the economy: the USA in particular with its customs policy continues to cause uncertainty.
There is great hope in Germany that the billions planned to be invested in roads, rails and defense will give a more significant boost to the economy by 2027 at the latest. But the federal government is under increasing pressure to initiate fundamental reforms in order to make the German economy, which has been weakening for years, sustainable: pensions, taxes, labor market, reduction in bureaucracy.
No relief for consumer prices
According to the EU Commission, consumer prices are likely to rise more than expected. An inflation rate of 2.9 percent is expected for Germany this year. The authority had previously assumed 2.1 percent. In the EU, the inflation rate is expected to rise to 3.1 percent, and 3.0 percent is forecast for the Eurozone.
To put things into perspective: The European Central Bank (ECB) is aiming for an inflation rate of two percent for the euro area in the medium term. With the surge in oil prices in the wake of the Iran war, inflation in the euro area has recently increased significantly. In April, consumer prices in the currency area were 3.0 percent higher than in the same month last year.
The higher the inflation, the lower the purchasing power of people. You can then afford less for one euro. Private consumption is an important support for the economy. Economists expect the ECB to raise key interest rates in the euro area in June to keep inflation under control. Higher interest rates would make loans more expensive, which could slow down demand and curb inflation. Savers would benefit from rising key interest rates if banks passed them on to them.
