The effects of the Iran war with high energy prices are slowing the recovery of the German economy – there is no noticeable upswing in sight. Economists are also lowering their economic forecast for this year. The Council of Economic Experts only expects a mini-growth of 0.5 percent for the German economy. Last fall, economists had expected gross domestic product to increase by 0.9 percent.
The uncertainty about the duration and impact of the Iran war on the German economy represents a “significant risk” for the forecast, according to the spring report presented in Berlin.
Massive consequences of the Iran war
The federal government halved its economic forecast a month ago and is also only expecting growth of 0.5 percent this year. The Iran war has largely brought shipping traffic to a standstill in the Strait of Hormuz, which is important for oil trade. As a result, oil and gas prices have risen sharply – but also for other products such as wheat and fertilizer.
Consumers are feeling this in the increased fuel prices at the pump. The high energy prices reduce the purchasing power of private households and thus private consumption, as stated in the spring report. A fuel discount is still valid in Germany until the end of June – it is unclear whether it will be extended.
Due to the rising costs of fossil fuels and advance payments, companies’ production costs increased, according to the report. According to economists, this further reduces the declining industrial production and inhibits private investment activity. At the same time, the slowdown in the global economy is putting a strain on German exports. Exports are a mainstay of the German economy.
Government spending supports growth
For 2027, the five-member Advisory Council, which advises the federal government, expects gross domestic product to grow by 0.8 percent. This is being driven by government spending billions to modernize the infrastructure. The Bundestag and Bundesrat had decided on a debt-financed special fund. However, it is repeatedly criticized that funds from this special pot are not flowing quickly enough and that money is being used to plug holes in the federal budget.
Inflation is rising
According to economists’ forecasts, the inflation rate is likely to be an average of 3.0 percent in 2026 and an average of 2.8 percent in 2027. In April, sharp increases in energy prices drove the inflation rate to 2.9 percent, the highest level since January 2024, according to the Federal Statistical Office.
Bigger drops?
The Iran war could continue and oil and gas prices could remain high. According to the report, this would dampen private consumption even more than previously expected. At the same time, the pressure on companies to pass on higher prices for production factors and energy to private households could increase.
The economists have drawn up a “risk scenario”. It is assumed that the price of crude oil will rise to 120 US dollars per barrel in May, remain at this level until October and fall below 100 US dollars in the second quarter of 2027 – the price of oil is currently below this mark. The Council of Experts estimates that in this scenario, gross domestic product should only increase by 0.2 percent in 2026 and by 0.5 percent in 2027. The inflation rate would then be 3.5 percent in 2026 and 3.2 percent in 2027.
Limit increases in social contributions
The Council of Experts proposes reforms to slow the increase in contributions to health and nursing care insurance. Otherwise, social contributions would rise sharply unabated. By involving civil servants, the financing of statutory health insurance could be strengthened. In order to limit long-term care insurance spending, economists suggest reviewing the concept of need for care and aligning it more closely with professional recommendations – this would reduce the number of people in need of care and at the same time lower the average level of care.
Coalition plans reform package
The black-red federal government wants to launch a major reform package by the summer break. These include a nursing care reform, a reform of the income tax to relieve the burden on small and medium incomes in particular, and a pension reform. However, it is still unclear how the reforms will actually look and how they will be financed. There could still be conflicts within the coalition.
In addition to rising social security contributions, business associations have long complained about high energy costs, a high tax burden, a lot of bureaucracy and long approval processes compared to other countries.
