Iran war drives Germany towards fourth year of stagnation
Berlin set to halve GDP growth forecast to 0.5% as surging energy prices blunt €1tn spending push
The impact of the Iran war on energy markets is dashing hopes of a German recovery, with Berlin poised to cut its growth forecast from 1 per cent to 0.5 per cent this year.
The expected downgrade, according to people familiar with the matter, would leave Europe’s largest economy on the brink of a fourth consecutive year of de facto stagnation, as surging energy prices blunt a €1tn debt-fuelled spending push.
“The economic development in Germany lost noticeable momentum in the first quarter against the backdrop of the conflict in the Middle East,” the German economy ministry warned earlier this week.
The modest growth forecast this year will be mainly driven by “the impulse from public spending”, as private investments, exports and domestic consumption stagnate, said a government insider.
German Chancellor Friedrich Merz warned on Monday that the economy would feel the impact of the US war on Iran “for a long time to come”, as he announced a €1.6bn package of short-term measures to alleviate rising fuel prices.
“We find ourselves in a very difficult economic and political situation given the large number of crises and wars around the world,” he said.
Commerzbank chief economist Jörg Krämer told the FT that it was “increasingly likely” that 2026 “will be another lost year in terms of growth”. Adjusted for the higher number of working days this year, his updated forecast stands at just 0.3 per cent, compared with 0.4 per cent on a working-day adjusted basis in 2025. “This is basically a black zero,” said Krämer.
While last year marked the first increase in GDP since 2022, the level of activity was still below the level seen back then and barely higher than before the start of the Covid-19 pandemic in early 2020.
“Stagnation is the new normal,” said Clemens Fuest, head of Munich-based think-tank Ifo. “We have long been used to the expectation that growth will resume at some point, but unfortunately this cannot be taken for granted anymore.”
Fuest said energy costs were exacerbating deeply rooted challenges including a shrinking workforce, limited productivity growth and ballooning red tape.
Government insiders have voiced concerns and in some cases a sense of helplessness about the external shocks — first US tariffs and now high energy prices — repeatedly derailing plans to revive growth and complicate difficult reforms of the welfare state.
One said that the problem was not just persistent uncertainty but also the sheer unpredictability of global events.
This is weighing on private investment decisions and consumer sentiment, they added, with inflation at least temporarily likely to rise above the ECB’s medium-term target of 2 per cent.
Before the start of the Iran war, economists had hoped that Merz’s €1tn spending push over the next decade to improve Germany’s armed forces and its ailing infrastructure would kick-start a wider recovery.
But Goldman Sachs economists estimate that the increase in government spending will boost GDP by just 0.5 percentage points this year.
The Iran war has dashed hopes that the spending push can create “a spirit of optimism” in the private sector that triggers a sustained economic upswing, Goldman economist Sven Jari Stehn told the FT.
The sharp rise in energy prices and economic uncertainty since the start of the Iran war in late February hit an economy that was still reeling from the 2022 shock after Russia’s full-scale invasion of Ukraine, Fuest said. “Germany’s energy-intensive industry is still weakened by the earlier strains,” he said.
Production in the chemical and pharma industry — one of the backbones of German industry — is down to levels last seen in late 2004 and has been sidelined for the past three years, according to Bundesbank data.
“The situation is serious, and it has not improved since the beginning of the war in the Middle East,” Henrik Meincke, the chief economist of the German Chemicals Industry Association, told the FT. “Companies are already closing production sites as they are struggling with low capacity utilisation and high margin pressure.”
Over the first quarter, insolvencies in Germany shot up to the highest number in more than 20 years and exceeded the levels seen during the global financial crisis of 2009. On a seasonally adjusted basis, the number of unemployed has risen in 41 of the last 46 months and is 30 per cent higher than before the start of the pandemic in early 2020.
Not all economists have written 2026 off completely. “If the government is able to deliver its fiscal package, the stimulus will be so big that it will be reflected in higher consumption and employment,” said Christian Schulz, chief economist of Allianz Global Investors.