Iran, ifo warns high energy prices will reduce German growth by 0.2 pct pts

Brussels – The war in Iran is “shutting down” the German economy. The alarm was raised by the ifo Institute, one of Germany’s leading think tanks, which in its economic forecasts for Germany released today (12 March) sees deterioration “in view of the war in the Middle East.” Specifically, it said that a short-term increase in energy prices “would slow down economic growth this year by around 0.2 percentage points compared to pre-war estimates,” meaning that the institute expects growth of 0.8 per cent this year and 1.2 per cent in 2027. 

Timo Wollmershäuser, head of forecasts at the ifo Institute, attributes the slowdown of the eurozone’s largest economy to negative expectations regarding production costs, shipments, and consumption. “We currently expect the inflation rate to rise to just under 2.5 percent if oil and gas prices fall again within the next few weeks. However, if the prices for fossil fuels remain at the current greatly increased level for an extended period of time, inflation could peak at just under 3 percent.” The latter scenario, with crude oil prices remaining high for an extended period, “would slow down growth by a further 0.2 percentage points.”

Germany, therefore, risks a contraction of between -0.2 per cent and -0.4 per cent of GDP. This slowdown could have repercussions on the rest of the eurozone, starting with Italy, which is linked to the German economy, especially in terms of components. However, there is some good news, as Wollmershäuser points out: “Despite the energy price shock, the recovery in Germany is likely to continue in the remainder of this year, particularly because additional government spending on infrastructure, climate neutrality, and defense will be expanded and have an increasing impact on demand.”

In any case, according to the ifo Institute, the German unemployment rate in 2027 will be lower than in 2026 in all scenarios. However, almost everything will depend on “how long the armed conflicts in the Middle East and the accompanying economic uncertainties last,” according to the think tank’s chief forecaster.