German economy growth forecasts halved

German Federal Economy Minister Katherina Reiche of the conservative Christian Democratic Union (CDU) only had bad news to deliver in Berlin. She expects the war in the Persian Gulf to limit Germany's economic growth to just half a percentage point this year.

"The escalation has set us back economically," the minister said. "The situation remains highly volatile." The annual economic report Reiche presented in January — before the US‑Israeli war against Iran began — is now obsolete. At the time, she expected a slow but steady economic recovery.

A range of scenarios has been mapped out at the Economy Ministry: One in which escalation in the Gulf continues — keeping the Strait of Hormuz closed — and another in which the war ends quickly and the free movement of goods through the strait becomes possible again. However, the minister told journalists in Berlin that predicting which outcome is more likely is impossible.

Reiche is certain of one thing: Inflation will rise more sharply this year — to 2.8%. Driving the higher prices are increased costs for gasoline, oil, gas, and electricity. Food prices are expected to climb even higher, according to her projection.

Shock over gas prices

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Shock, crisis, and instability

The tentative green shoots of economic recovery that had begun to push through after three years of stagnation from 2023 to 2025 is now being hit by increasingly fierce headwinds, Reiche said: "The war in the Middle East has triggered an energy‑price shock beyond our control, and it is weighing heavily on both households and the economy."

Structural reforms to bolster the competitiveness of German companies are now more urgent than ever. "The crisis cannot be allowed to obscure the tasks before us," she added. "Our potential growth is too low, and we have to lift it. Our competitiveness is under significant strain."

Potential growth — the level of long‑term growth an economy can achieve under normal capacity utilization — stands at only 0.5% of Germany's GDP. The Economy Ministry's analysis shows that this is far too low to safeguard prosperity in Germany in the years ahead.

An increasing number of industrial jobs in Germany are being cut and, in some cases, moved abroad where conditions are more favorable, Reiche said. Herself the former head of an energy company, she warned that Germany is losing ground to competitors in Europe and around the world. "Our growth weakness is above all structural — other countries have done their homework," she said. According to the European Commission in Brussels, Germany still ranks at the bottom of Europe's growth tables.

Reiche won't offset high energy prices

Reiche views further market interventions and state support measures such as fuel‑price caps or tax cuts on energy prices with deep skepticism, in contrast to Finance Minister Lars Klingbeil, of the Social Democratic Party (SPD). "Tax relief measures do not fall from the sky," she said. The money to fund them "first has to be earned." Some of the measures being proposed by the SPD, such as a special tax on extraordinary profits in the oil industry, have significant side effects, she argued. Reiche rejects it, saying that it could prompt refinery operations to move out of Germany.

Prices are rising worldwide because market shortages have been worsened by missing deliveries from the Gulf states. On Wednesday, the European Commission presented its assessment of a possible EU‑wide excess‑profits tax — and it shares the German economy minister's skepticism. The EU had already enabled such a tax once before, during the price surge at the start of Russia's war against Ukraine. Legal challenges to that levy, which brought €2.5 billion ($2.9 billion) into Germany's public coffers, are still pending before the European Court of Justice in Luxembourg.

Germany's public debt is rising

The leading economic research institutes had already released their spring forecast before Easter, and they agree with Reiche that Germany's economic growth will be only half of what had been assumed before the war in Iran started.

Timo Wollmersheim, a business‑cycle researcher at the Ifo Institute in Munich, pointed out that this year's minimal growth is being driven largely by debt‑financed government investment — and that comes at a price.

Researchers point to "long‑term risks to the stability of public finances and the substantial consolidation requirements anticipated toward the end of the decade." In practice, that means interest payments in the federal budget will rise sharply. Money spent on servicing debt will then no longer be available for social services or pensions.

A large majority of German companies report negative effects from the Middle East war, according to a survey by the German Chamber of Industry and Commerce. Existing problems, they say, are being amplified. International firms are, the report said, also holding back on investment in Germany: Energy is too expensive; bureaucracy too extensive; and digitalization still sluggish, according to a survey of 400 international companies conducted by KPMG.

This article was originally written in German.