GERMANY’S economy ministry cut its growth forecasts for 2026 and 2027 and raised its inflation projections yesterday, as the Iran war drives up oil and gas prices.
The government now expects 0.5 per cent growth for 2026, down from an earlier projection of 1.0pc, and cut its 2027 growth outlook to 0.9pc from 1.3pc, confirming a Reuters report last Thursday.
“The German economy is on a modest recovery path, but the headwinds have intensified,” Economy Minister Katherina Reiche said. “The economic recovery expected for this year is once again being held back by external geopolitical shocks.”
The war in Iran is driving up energy and raw material prices, the minister said, placing financial strain on private households and increasing costs for Germany’s economy.
The ministry now expects inflation to accelerate to 2.7pc this year and 2.8pc in 2027, up from 2.2pc last year.
Further economic developments will depend to a large extent on how the conflict in the Middle East evolves and are subject to considerable uncertainty, the minister said.
In addition to the war in Iran, international trade faces headwinds from protectionist measures and economic fragmentation, hindering Germany’s export-oriented economy from leveraging foreign trade to boost growth. Exports are not expected to rise on a year-over-year basis until 2027, when they are forecast to increase by 1.3pc.
Imports are expected to grow faster, rising by 1.8pc in 2027, which would narrow Germany’s trade surplus. Europe’s largest economy has been struggling since the Covid-19 pandemic to regain momentum. Heightened competition from China and higher energy costs are posing significant challenges to its export-driven economic model.
Reiche said she will travel to China in May to discuss key issues between the trading partners.
Germany’s constitutionally enshrined debt brake allows structural deficit spending of up to 0.35pc of gross domestic product. Its cyclical component also permits additional borrowing during economic downturns.
Because the economic outlook has been downgraded, the government will be able to borrow an additional 2.7 billion euros ($3.17bn) for its 2027 budget, as growth is now expected to be weaker than initially forecast.
Finance Minister Lars Klingbeil is aiming to complete the first draft of the 2027 budget by the end of this month.
The recovery of the German economy is being driven primarily by domestic demand, Reiche said.
With rising real incomes, private consumption remains a pillar of the German economy despite the loss of purchasing power resulting from the energy price shock. In nominal terms, consumption is expected to grow by 3.2pc in 2026 and 3.3pc in 2027. When adjusted for inflation, the increase is expected to be 0.4pc this year and 0.5pc in 2027.
Government spending, especially on infrastructure and defence, will contribute to the overall economic recovery, with 5.2pc growth expected in public spending this year in nominal terms, or 2.0pc when adjusted for inflation.
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