The Iran War and those following significantly increased energy prices have a negative impact on the economic recovery in Germany. This comes from the Economic forecast from the Munich ifo Institute out. Accordingly, growth is expected to fall by at least 0.2 percentage points. According to economic researchers, the longer the war lasts, the more serious the effects will be. They also expect inflation to rise, at least temporarily.
However, according to economists, the economic recovery would not come to a complete standstill even if the war lasted longer than expected. Despite the increased cost of energy, “the recovery in Germany is likely to continue over the course of this year,” said Timo Wollmershäuser from the ifo Institute.
Forecasts for de-escalation and escalation scenarios
Because of the uncertainty regarding further political developments, the institute published two possible scenarios for the current year in this year’s spring forecast: If the war ends soon, the German economy could grow by 0.8 percent this year according to the “de-escalation scenario” – 0.2 percentage points less than would otherwise have been expected. In 2027, growth could accelerate further to 1.2 percent.
However, if the war lasts longer, the negative effects on the economy would be significantly greater in the “escalation scenario”: According to the Ifo Institute, gross domestic product would only increase by 0.6 percent this year and by 0.8 percent in 2027.
If the war ends quickly, economists expect an inflation rate of 2.2 percent this year, as in 2025. The expected slight decline of 0.2 percentage points will therefore not occur. In the short term, the inflation rate could even rise to 2.5 percent. In the “escalation scenario,” the inflation rate this year could be 2.5 percent – and at its peak it could be up to three percent.
Upswing not driven by exports
According to the ifo Institute, the reason why the forecast continues to assume an upturn is primarily the additional spending on infrastructure, climate neutrality and defense decided by the federal government and the Bundestag. These would have a positive effect on demand. The impact of the federal government’s special funds – particularly in the defense sector – has even developed “somewhat faster” than originally expected, the researchers write. “This recovery is likely to continue this year and next, although the sharp rise in prices for crude oil and natural gas following the start of the Iran war will put a damper on it.”
According to the ifo Institute, the recovery is atypical for Germany as it is not driven by export business. Rather, exports of goods continued to fall. The upswing, however, was initiated by domestic impulses that are related to state financial policy. In the fourth quarter of 2025, government investment in equipment and public consumer spending in particular increased significantly.
The economic recovery is arriving on the labor market with a slight delay. “When the turnaround will come depends on the length of the armed conflict in the Middle East and the associated economic uncertainties,” said Wollmershäuser.