The shock in energy caused by the war in Iran led the German government to halve its growth forecast for 2026 on Wednesday, emphasizing the need to accelerate reforms to revitalize the leading European economy.
Germany now expects a Gross Domestic Product (GDP) growth of 0.5% this year, down from 1.0% in January, and 0.9% in 2027, down from the previous 1.3%.
“The economic recovery expected this year is once again constrained by external geopolitical shocks,” said Economy Minister Katherina Reiche.
Inflation is projected to reach 2.7% this year, up from 2.1% in January, and 2.8% next year, driven by energy prices.
Germany’s economic outlook aligns with major economic institutes in the country, which revised their forecasts in early April to predict a 0.6% GDP increase for 2026 and 0.9% for 2027 due to the sharp rise in energy costs linked to the war.
Amidst these challenges, Minister Reiche emphasized the “need for deep structural reforms to restore a growing and competitive economy,” a key focus of Chancellor Friedrich Merz’s government in power for over a year.
Impacted by the energy shock from the war in Ukraine due to its heavy reliance on Russian gas, Germany finds itself at the bottom of the EU growth rankings despite significant fiscal stimulus, according to the conservative minister.
Neighboring Italy slightly revised its GDP growth forecast to 0.6% for 2026, while France aims for 0.9%.
The Minister highlighted that Germany’s growth weakness is primarily structural and emphasized the demographic challenge of an aging population affecting the economy.
To address this, she stressed the importance of increasing labor force participation, extending working lives, and better utilizing skills.
However, after almost a year of coalition government between conservatives (CDU-CSU) and social democrats (SPD), tensions with business leaders are high, demanding reforms to restore competitiveness.
Ms. Reiche expressed the intention to properly implement existing initiatives, despite challenges in agreeing on issues like pension reforms, healthcare, wage costs, bureaucracy, and ongoing legislative matters.
The German economy’s modest growth will rely mainly on domestic demand, supported by real income growth and additional public spending boosting activity.
Global trade fragmentation continues to weigh on German exports, traditionally a key driver of the economy, which are expected to stagnate this year following a 0.4% decline in 2025 due to competitiveness loss and Chinese competition.
Government projections will depend on the Middle East conflict’s evolution, with alternative scenarios based on energy prices introduced for the first time to account for uncertainties. In the least favorable scenario, growth could be further reduced by about 0.5 percentage points this year, with inflation rising by 1.6 points.
