Germany Slashes 2026 Growth Forecast Amid Middle East War Energy Shock

Germany has significantly lowered its economic growth projections for the next two years, citing the severe impact of the Middle East conflict on global energy prices. The government now expects gross domestic product to expand by just 0.5 per cent in 2026, down from a January forecast of 1 per cent, and to grow by 0.9 per cent in 2027, revised down from 1.3 per cent.

The sharp downgrade reflects a renewed surge in oil and gas prices following the escalation of hostilities in the region, which has pushed up inflation and raised costs for German manufacturers already grappling with structural weaknesses. Economy Minister Katherina Reiche said the conflict had dealt “a heavy blow” to the country’s recovery, compounding challenges from previous energy shocks and global trade tensions.

Inflation forecasts have also been revised upwards, with consumer prices expected to rise by 2.7 per cent in 2026 and 2.8 per cent in 2027, compared with 2.2 per cent this year. The higher costs are hitting industry hard, particularly energy-intensive sectors such as steel and chemicals, while households face increased fuel and living expenses.

Surveys show growing pessimism among investors, with sentiment in April at its lowest level since late 2022. Businesses have expressed frustration at the slow pace of reforms under Chancellor Friedrich Merz’s coalition government, despite promises of major public spending on defence and infrastructure to revive growth.

While the administration has introduced limited relief measures, including a tax-free bonus for workers, critics argue these efforts are insufficient and poorly targeted. Reiche acknowledged the need for “swift and determined reforms” in areas such as healthcare, pensions, and bureaucracy to secure long-term growth, urging that the crisis not distract from these priorities.

With parliamentary summer recess approaching, the coalition has pledged to push through an ambitious reform agenda, though analysts remain sceptical about what can be achieved in the short term.