Germany's gross domestic product (GDP) will grow by 0.5% in 2026, according to new projections from the German Institute for Economic Research (DIW), which has halved its April forecast due to the impact of the energy price 'shock' linked to the war in the Middle East.
In fact, the institution considers it likely that the German economy will contract slightly "in both the second and third quarters," which would constitute a technical recession before activity manages to stabilize towards the end of the year.
At the same time, the prestigious Berlin-based institute has significantly cut its expansion estimate for the eurozone's largest economy in 2027, now placing it at 0.8% compared to the 1.4% it projected in its previous report.
In contrast, the DIW now forecasts that the inflation rate in Germany will reach 2.9% in 2026, half a percentage point higher than calculated in the spring, while for next year it predicts a price increase of 3%, above the previously contemplated 2.3%.
"After a somewhat promising start to the year, the German economy has lost momentum again," as the rise in energy prices following the outbreak of the war with Iran at the end of February is acting as a strong drag on activity.
Even with the negative effect associated with the energy price 'shock', Geraldine Dany-Knedlik, head of economic forecasting at DIW Berlin, has stressed that the current situation is not a repeat of what happened in 2022/23 after the start of the war in Ukraine.
"The crisis is smaller, energy supply remains secure, and Germany is now less dependent on fossil fuel imports," she pointed out, emphasizing that this year's GDP growth "is due exclusively to public spending" linked to the increased defense budget and the deployment of the special fund for infrastructure and climate neutrality.
"Fiscal stimulus measures do not fully offset the economic recession," Dany-Knedlik added, warning that this expansionary policy comes at a cost, as the public accounts deficit will widen to 3.9% of GDP in the current fiscal year and to 4.3% in the next.