Kiel Institute Sticks to Growth Forecast for Germany – Energy Prices and Iran War Are Dragging It Down

IfW President Moritz Schularick pointed to the Iran war as a dampening factor when presenting the summer forecast. „Die Folgen des Iran-Kriegs dämpfen die Wirtschaftsleistung“, said Schularick. In addition, the rise in commodity prices is proving more persistent than assumed: „Der Anstieg der Rohstoffpreise erweist sich als persistenter, was die wirtschaftliche Dynamik bis in das kommende Jahr hinein belasten wird.“ Fiscal policy is indeed providing expansionary impulses, but these cannot fully offset the external economic burdens.

Risks From the Iran War and Commodity Prices

The IfW's economic expert, Stefan Kooths, also expressed concern about the structural weaknesses of the German economy. „Die nachlassende Wettbewerbsfähigkeit der deutschen Wirtschaft wird weitere Verluste an Weltmarktanteilen nach sich ziehen“, warned Kooths. Without far-reaching reforms, the German economy faces a path of weakening growth forces and intensifying distributional conflicts. „Gemessen an früheren Aufschwüngen fallen die erwarteten Zuwächse mager aus. Ohne durchgreifende standortstärkende Reformen driftet die deutsche Wirtschaft in ein Fahrwasser aus erlahmenden Wachstumskräften mit sich verschärfenden Verteilungskonflikten“, he said.

The IfW currently sees few signs of a strong recovery in German exports and corporate investment of the kind that was typical of past upturns. Although export figures have recently stabilized after several years of decline, a dynamic recovery is out of the question. Sentiment also remains subdued when it comes to investment and the labor market: the IfW expects persistently low corporate investment and noticeably clouded employment prospects.

Government Spending Is Supporting the Economy

According to the IfW, stabilizing effects come primarily from government spending and investment programs. In the researchers' assessment, public consumption and government investment are supporting growth and preventing the economy from sliding into a full-blown downturn. Private households, in turn, are suffering from higher energy costs, which are noticeably eroding their purchasing power. For the coming months, the researchers therefore expect only a modest increase in private consumption.

IWH Sees Similar Risks

The Leibniz Institute for Economic Research Halle (IWH) comes to a similar conclusion. Its Vice President Oliver Holtemöller described the Gulf conflict as the central risk factor when presenting the IWH forecast in Halle: „Das wesentliche Risiko für die Weltwirtschaft wie auch für die deutsche Konjunktur liegt im ungewissen Fortgang des Golfkonflikts.“ If the situation in the Gulf region remains tense and energy prices continue to rise, German economic output could, in the worst case, stagnate in 2026.

In its baseline scenario, however, the IWH assumes that the situation will ease and forecasts growth of 0.9 percent for both 2026 and 2027. The IWH also expects slightly rising exports after three years of decline, as well as an increase in private consumption. Both institutes thus share the assessment that the German economy in 2026 is balancing on a narrow path between stagnation and modest growth – and that geopolitical developments in the Middle East could tip the scales.

The economic researchers at both institutes agree that the conflict in Iran and the Gulf region is already noticeably weighing on the German economy. The higher energy prices are raising production costs for many companies and at the same time eroding the purchasing power of private households. Without a calming of the situation and without tangible reforms to strengthen the country's competitiveness, the economy risks remaining stuck in a pattern of weak growth and growing distributional conflicts, the experts warn. The reports are based on analyses by dpa.