Germany growth forecast cut on energy shock, signaling trouble ahead
Werner Schnell | Flickr Open | Getty Images
Europe’s biggest economy was set for a rebound, but now it’s being hammered by soaring energy costs caused by the Iran war, prompting the federal government to halve growth forecasts.
Germany’s flagship fiscal stimulus package is in the spotlight as ministers scramble to cushion the impact of higher bills.
Before the war, the country had been powered by rising industrial orders, dropping inventories, and improving sentiment, thanks mainly to fiscal spending on defense and infrastructure.
But higher energy prices and supply chain risks are “spoiling the German growth party before it even started,” said Carsten Brzeski, global head of macro research at ING.
The Federal Ministry for Economic Affairs and Energy this week slashed its growth forecast for 2026 to 0.5% from 1%, while its 2027 forecast was cut from 1.3% to 0.9%. Inflation is now projected to reach 2.7% this year and 2.8% the next.
Brzeski noted that industrial production was already “stuttering” before the war, sliding 0.3% month-on-month in February and printing flat on an annual basis.
But now the Iran conflict has sent business sentiment into freefall.
‘Trouble ahead’
On Friday, the Ifo Institute for Economic Research’s latest business climate index — a key temperature gauge of Germany’s economic mood — dropped to 84.4 in April, down from 86.3 in March, its lowest level since May 2020, early in the Covid-19 pandemic.
Current assessments dipped from 86.7 to 85.4 month-on-month, while forward expectations tumbled from 85.9 to 83.3. Separately, the ZEW Indicator of Economic Sentiment slumped 16 points to -17.2 in April, its lowest reading since December 2022. The ZEW tracker tumbled from +58.3 in February to -0.5 points in March, indicating a rapid and deepening pessimism over the country’s economic outlook.
“What we are seeing is that the German economy is hit hard by the Iran crisis,” Clemens Fuest, president of Ifo, told CNBC on Friday. “Companies are telling us there is trouble ahead.”
Germany remains one of Europe’s largest net importers of energy, about 6% of which comes from the Middle East, according to ING analysis, while its so-called “energy-intensive” industries, which employ almost 1 million people, account for about 17% of industrial gross value added.
To cushion the energy shock — Brent crude prices have spiked almost 73% higher year-to-date — Germany’s coalition government earlier this month agreed a two-month tax relief on petrol and diesel, worth about 1.6 billion euros ($1.87 billion). Katherina Reiche, federal minister for economic affairs and energy, said the federal government has acted “quickly and decisively to relieve the burden” of rising fuel costs.
Brzeski said the war has underscored Germany’s heavy dependence on energy imports. “It is another painful reminder that simply shifting dependencies from one, Russia, to the other, the Middle East, is not a structural solution,” he told CNBC via email.
But it’s not just…
Read More: Germany growth forecast cut on energy shock, signaling trouble ahead