RWI lowers German growth forecast as Iran conflict pushes up energy prices

Germany’s economic outlook has weakened slightly as rising energy prices linked to the conflict involving Iran weigh on industrial costs and consumer spending, according to the latest forecast from the RWI – Leibniz Institute for Economic Research.

The institute now expects Germany’s GDP to grow by 0.9% in 2026 and 1.2% in 2027, slightly below its December forecast. RWI economists say the escalation of the Iran conflict has significantly altered the economic outlook by driving energy prices higher.

Since late February, tensions in the Middle East have disrupted global energy markets after Iran effectively blocked the Strait of Hormuz, a key shipping route for around 20% of global oil and gas supplies. Oil prices briefly climbed to $108 per barrel, while European gas prices doubled to more than €50 per megawatt hour. Fuel prices in Germany increased by as much as 17%, adding pressure to households and businesses.

Higher energy costs are expected to affect energy-intensive industries in particular, while rising transport and food costs could further push up consumer prices.

Inflation expected to rise

After consumer price inflation reached 1.9% in February, RWI now forecasts an average inflation rate of 2.6% for 2026 and 2.4% for 2027, with the peak expected during the summer months.

Moderate wage growth is expected to limit inflationary pressure somewhat. Collectively agreed wages are projected to rise by 2.7% in 2026 and 2.9% in 2027, while effective wages are expected to increase by around 3% annually.

Public spending supports growth

Despite the energy shock, RWI expects the German economy to continue recovering modestly, largely supported by government spending. Public investment programs, including climate and infrastructure funds, are expected to inject around €10 billion per year into the economy, while defence spending will rise by roughly €7 billion annually.

Private investment remains subdued, however, as many companies still have unused capacity and export demand weakens. Trade tensions with the United States and structural competitiveness challenges are also weighing on Germany’s export-driven industries.

Fiscal deficit widening

Expansionary fiscal policy is expected to push Germany’s public deficit higher. The funding gap is projected to increase from €119 billion in 2025 to €186 billion in 2026 and €213 billion in 2027, with the deficit reaching 4.4% of GDP by 2027.

The unemployment rate is forecast to remain 6.3% in 2026 before declining to 6.0% in 2027, with labour market conditions expected to improve in the second half of next year.

Energy risks remain key uncertainty

RWI warns that the economic outlook remains highly uncertain due to the unpredictable course of the Middle East conflict. A prolonged disruption of energy supplies could push gas prices even higher. If gas prices were to rise to €90 per MWh, inflation would increase by an additional 0.4 percentage points, while GDP growth would decline by a similar amount.

“The Iran conflict shows how vulnerable the German economy remains to energy dependencies,” said RWI economic head Torsten Schmidt. He added that without government stimulus, the recovery would be significantly weaker, while structural reforms will remain essential for sustainable growth.

Source: RWI, Photo: Fotolia