Frankfurt (Germany) (AFP) – The German government Wednesday halved its 2026 growth forecast due to the Middle East war energy shock, while vowing to step up reform efforts as criticism grows they are moving too slowly. Gross domestic product (GDP) in Europe’s biggest economy is expected to expand 0.5 percent in 2026, officials said, down from a projection of one percent made in January. The government also cut its forecast for 2027 to 0.9 percent, down from 1.3 percent.
Hopes had been high that the eurozone’s traditional growth engine would sputter back to life in 2026 after years of stagnation, driven by Chancellor Friedrich Merz’s public spending blitz. But the jump in oil and gas prices since the start of the US-Israeli war on Iran has dealt the economy a heavy blow, pushing up overall inflation and raising costs for the country’s crucial manufacturers. Presenting the new forecasts, Economy Minister Katherina Reiche said that before the conflict, there had been signs of a moderate recovery. “But the escalation in the Middle East has set us back economically,” she told a press conference. “The shock has hit the structurally weakened German economy hard once again.” More costly energy was weighing on industry while the public finances were being strained by a rise in government borrowing costs on international markets since the outbreak of the conflict in February, Reiche said.
The downgraded forecasts follow a similar move by leading economic institutes in early April, which are now forecasting just 0.6 percent growth this year. Germany has lagged behind the European average in terms of growth in recent times, highlighting the deep problems facing its industrial base in particular.
Before the Iran war, the economy was just getting back on its feet after the energy shock triggered by the Ukraine war and last year’s US tariff blitz. The renewed surge in energy prices is a particular burden for Germany’s heavy industry, in sectors ranging from steel to chemicals, which was also struggling with weak demand in export markets and fierce Chinese competition. Knock-on effects, like supply chain snarls that are delaying delivery of vital base products, are weighing on industry, while consumers are facing higher costs, especially at the petrol pump.
On Wednesday the government also raised its inflation forecasts, to 2.7 percent in 2026 and 2.8 percent in 2027, compared to 2.2 percent in 2025. Surveys highlight the darkening picture. A poll this week showed that German investor morale hit its lowest level in April since late 2022, when the country was battling the fallout from Russia’s full-scale invasion of Ukraine.
The government is scrambling to respond. As well as the relief on fuel prices, Merz has announced that businesses can pay workers a tax-free bonus of up to 1,000 euros ($1,170). Still, many economists and business groups have criticised the measures as ill conceived, saying they are not properly targeted at needy groups. While defending the policies, Reiche also acknowledged there should be a renewed focus on pushing through deep reforms to areas like healthcare, pensions, and bureaucracy. “Without swift and determined reforms, our country will lack the basis to secure future growth and prosperity,” she said.
Businesses have become increasingly frustrated with the slow pace of progress from Merz’s coalition. The chancellor, who took power in May last year, promised to revive the economy through huge public outlays on defence and infrastructure and a barrage of reforms. But the spending has moved slowly and structural overhauls have made little headway, bogged down by lengthy talks between his centre-right CDU party and its coalition partners, the centre-left SPD. The coalition is promising to push through an ambitious programme before parliament’s summer recess, though critics doubt what can realistically be achieved so quickly.
Reiche — who is from the CDU and has clashed with SPD colleagues on issues including energy policy — stressed that the Iran conflict should not distract Germany’s leaders from important tasks. “The crisis must not blind us from what we need to do,” she said.
© 2024 AFP
