Germany slashes growth forecast after Iran war hits economy

Germany has sharply downgraded its economic outlook for 2026, cutting its growth forecast in half as the fallout from the Iran war continues to weigh on Europe’s largest economy, Bloomberg reports.

The German government now expects gross domestic product to expand by just 0.5% in 2026, down from the 1.0% projection issued earlier. The 2027 forecast was also reduced to 0.9% from 1.3%, according to economic officials cited in reports published Wednesday.

The downgrade reflects the broader impact of the conflict in the Middle East, which has driven up global energy prices and disrupted supply chains, placing additional pressure on Germany’s export-heavy economy.

Inflation forecasts have also been revised higher. Prices are now expected to rise by 2.7% in 2026 and 2.8% in 2027, compared with previous estimates, as higher energy and raw material costs feed through into consumer prices.

Economy Minister Katherina Reiche said geopolitical instability, rising protectionism, and fragmentation in global trade are increasingly weighing on growth prospects. She warned that external shocks are amplifying structural weaknesses in the German economy.

Exports are now expected to recover only modestly by 2027, while imports are projected to grow more quickly, narrowing Germany’s traditional trade surplus.

Despite the weaker outlook, domestic demand is expected to provide some support, driven by rising real incomes and increased public spending on infrastructure and defence. Nominal household consumption is forecast to rise by more than 3% in both 2026 and 2027.

Reiche stressed, however, that Germany must pursue structural reforms, including lower taxes, reduced energy costs, and cutting bureaucratic barriers, in order to restore long-term competitiveness.

By Vafa Guliyeva