The Macroeconomic Policy Institute (IMK) said on Thursday that Germany's economic expansion will be weaker than it previously expected this year and next, attributing the downgrade to higher energy prices stemming from the Iran war.
Revised growth outlook
IMK now anticipates gross domestic product growth of 0.6% in 2026 and 0.9% in 2027. Those figures reflect reductions from the institute's March projections of 0.3 percentage points for 2026 and 0.7 percentage points for 2027.
Assumptions underpinning the forecast
- The outlook assumes the conflict does not escalate further.
- Energy shipments through the Strait of Hormuz are expected to normalise later this year.
- Oil and gas infrastructure in Gulf states is assumed not to suffer substantial additional damage.
IMK director Sebastian Dullien underlined the conditional nature of the assessment, saying:
"The economic damage from the Iran war is significant, but manageable if the conflict does not drag on for many months,"
Inflation and policy guidance
The institute raised its inflation forecast, expecting an average rate of 2.8% in 2026, higher than it had previously assumed, before easing to 2.3% in 2027. IMK warned policymakers against rapid and substantial increases in interest rates. It argued that a monetary-policy-induced recession would not be helpful if the energy shock turns out to be temporary.
Drivers of the downgrade
IMK said higher energy costs will restrain private consumption, a key demand component, while noting that greater public investment is projected to provide stronger growth support in 2027. The institute highlighted the tension between weaker private spending due to energy-related price pressure and the stabilising effect of fiscal investment plans.
Implications and uncertainty
The forecast and the institute's guidance both rest on the assumption that disruptions to energy flows and infrastructure remain limited. If those assumptions fail, IMK's baseline would be undermined, with consequences for consumption, investment and the overall pace of economic recovery.
This assessment presents a conditional, moderate downward revision to Germany's near-term growth path driven by energy-price developments tied to the Iran war, along with a recommendation that the European Central Bank proceed cautiously when considering further rate increases.