Germany is facing the threat of a recession due to the war in Iran and the resulting rise in oil prices, economists warned on Wednesday.
The German Institute for Economic Research (DIW) has halved its growth forecast for 2026 to 0.5%, with gross domestic product (GDP) expected to increase by 0.8% next year.
"Rising oil and gas prices are driving up consumer prices, eroding the purchasing power of private households and increasing uncertainty," the institute said.
According to the DIW, the German economy is likely to “contract slightly in both the second and third quarters” before stabilizing towards the end of the year.
Consumers must brace themselves for rising prices, with inflation expected to exceed the European Central Bank’s 2% target, reaching 2.9% cent this year and 3% in 2027.
Furthermore, the unemployment rate is likely to rise slightly to 6.4% in 2026 before falling back to 6.2% in 2027.
Germany is not facing a second energy crisis like the one caused by the war in Ukraine in 2022-23, said DIW researcher Geraldine Dany-Knedlik.
"The shock is less severe, the energy supply is still secure, and Germany is less dependent on fossil fuel imports today than it was after the start of the war in Ukraine," she said.
The fact that the economy is growing at all is thanks to billions in government spending on defence and infrastructure, the DIW said. Private consumption and export-oriented industry, by contrast, are only slowly gaining momentum.
In the view of DIW President Marcel Fratzscher, the government should take targeted measures to ease the burden on people on low incomes, for example with a flat-rate energy cost allowance as in 2022.
The government's two-month fuel rebate, by contrast, is expensive, not targeted and helps oil companies, the institute argued.
"The federal government should not repeat this mistake a second time and should therefore not extend the fuel rebate beyond June 30," Fratzscher said.
