IMF lowers growth forecast for Germany once again – Iran war dampens the economy

Economy under energy shock

The current IMF forecast of 0.7 percent for 2026 is above the expectation of the German federal government and the Council of Economic Experts, which assume growth of just 0.5 percent for Germany this year. The Bundesbank likewise expects only „minimal calendar-adjusted growth of 0.5 percent“ for Germany.

Germany had narrowly avoided a third consecutive year of zero growth in 2025 with a mini-increase of 0.2 percent. With the latest IMF revision, such meager development is also coming within reach for 2026. „Die deutsche Industrie leidet unter hohen Energiepreisen und Problemen im Exportgeschäft„, the IMF wrote.

Globally, the IMF also lowered its growth expectation for the current year by 0.1 percentage points, to now 3.0 percent. „Die Weltwirtschaft habe den Schock durch den Krieg bislang besser überstanden als erwartet, hieß es. Angesichts eines Wiederaufflammens des Kriegs drohen allerdings neue Belastungen für die Wirtschaften in aller Welt„, the IMF explained.

Global outlook darkens

For the eurozone, the IMF now expects growth of just 0.9 percent in 2026, which is 0.2 percentage points less than previously assumed. The IMF assumes that key interest rates in the US and the eurozone will initially remain stable due to stubborn inflation. The US Federal Reserve had most recently held its key interest rate at 3.5 to 3.75 percent. The European Central Bank had previously raised its deposit rate for the first time in nearly three years, by 0.25 percentage points to 2.25 percent.

According to IMF data, global inflation rose for the third month in a row in May, driven primarily by rising energy prices. „Die Energiepreise liegen ungefähr 25 Prozent höher als vor dem Krieg„, the IMF wrote. For 2027, the IMF forecasts global inflation of 3.9 percent – 0.2 percentage points more than assumed in April and almost double the long-term inflation target of 2 percent. For the current year, the Fund now expects global inflation of 4.7 percent, compared to 4.4 percent previously.

The main reason for the worse outlook is the blocked strait. The IMF assumes in its projections that the Strait of Hormuz will be gradually reopened to shipping from mid-July. „Die Lage dürfte sich nach dieser Annahme bis März 2027 weitgehend auf den Vorkriegszustand einpendelt haben„, the Fund wrote. Afterwards, the US government and Tehran had actually agreed on a ceasefire – but the situation remains fragile.

Situation in the strait remains fragile

According to media reports, Iran's military announced a response to the US attacks. The US military had bombed dozens of targets in Iran overnight in response to attacks on tankers in the Strait of Hormuz. Shortly afterwards, the army of the Gulf state of Kuwait reported hostile fire; sirens also sounded in the early morning in Bahrain.

At the same time, the US reimposed previously relaxed sanctions on Iranian oil and withdrew an exemption granted just around two weeks earlier. The oil markets reacted promptly with price increases. A partial ceasefire between Washington and Tehran as well as a framework agreement had initially calmed the markets somewhat, but prices remained above pre-conflict levels.

In this situation, the IMF warns that some emerging and developing countries, unlike before, may be able to draw on reserves. „In einigen Schwellen- und Entwicklungsländern werde das allerdings aufgrund fehlender Vorräte nicht möglich sein, betonte der IWF„. There, in the event of a renewed blockade of the strait, there would be „neue Belastungen für die Wirtschaften in aller Welt„, the report continued.

Monetary policy facing tension

The IMF sees the AI boom as a support for the global economy: progress and market launches of AI models are supporting the upswing, the institute writes. Countries like South Korea and Taiwan, which export hardware for AI, have recorded significant growth jumps. Germany has so far benefited little from this.

For the coming weeks, the IMF expects the situation on energy and currency markets to remain tense for the time being. If the security situation in the Gulf region were to escalate again, the already weak German economy is likely to come under further pressure.

AI boom as a support for the global economy

Meanwhile, according to IMF estimates, energy prices have calmed down faster than initially expected following the blockade of the strait. Nevertheless, the price level remains significantly elevated – and with it the headwind for Germany's export-dependent industry.

With regard to monetary policy, the IMF assumes that the central banks in the US and the eurozone will largely keep their key interest rates stable in the short term. Higher energy prices and weaker growth dynamics pose a dilemma for the monetary authorities: On the one hand, the economy is slowing rate cuts, while on the other, inflation is driving the need for higher rates. The IMF sees no room for significant rate cuts in this tension field for the time being.