The Ifo Institute projects that German GDP will grow by 0.8 percent this year. Similarly, economic researchers expect growth of 0.8 percent for the coming year, according to the Munich-based institute. According to Ifo Chief Economist Timo Wollmershäuser, the economy is currently defined by opposing forces. While a significant energy price shock stemming from the conflict in the Middle East is slowing the economy, a strongly expansive fiscal policy is supporting growth.
The Ifo Institute estimates that the energy price shock will constrain economic performance by 0.4 percentage points in both years. Conversely, the expansive fiscal policy, which involves substantial new spending on infrastructure, climate neutrality, and defense, contributes 0.5 percentage points to economic growth each year.
Wollmershäuser predicts that the recovery period that began last year will temporarily pause during the second quarter of this year. “The German economy will stagnate for a time, but it will not fall into a recession,” he observed. He suggests that the recovery should resume and accelerate toward the end of 2026, provided the conflict in the Middle East de-escalates.
The current growth, however, comes at a considerable cost. The state’s financing deficit is expected to worsen significantly, rising from 2.8 percent in 2025 to 4.1 percent in 2026 and then peaking at 4.9 percent in 2027. By 2027, the gross debt-to-GDP ratio is projected to reach around 68 percent of economic output. Furthermore, the actual costs arising from the energy price shock linked to the Iran crisis are substantial: the projection indicates that Germany will lose approximately 34 billion euros in purchasing power this year and the next due to sharply increased prices for imported energy. The inflation rate is expected to increase to 2.9 percent in 2026, before dropping only slightly to 2.7 percent in 2027.
The long-term forecast from Ifo remains cautiously pessimistic. Demographic change and weak productivity development are expected to limit potential growth to a historically low 0.1 percent until the end of the decade. While current government impulses provide short-term stability, they are predominantly structurally maintained. Wollmershäuser stated that “to sustainably increase growth potential, deep-rooted reforms are necessary to transform a state-supported pause into permanent, autonomous economic growth.”
The projection is based on the assumption that the Middle East conflict will ease in the coming weeks and that the Strait of Hormuz will reopen. The assumed energy price trajectory aligns with average forward market quotations from May 2026. In this scenario, crude oil prices should begin to fall in the third quarter of 2026 and cost slightly less than 80 US dollars by the end of 2027. Recent short-term market quotations suggest a potentially faster decline in energy prices. If this occurs, inflation could decrease more rapidly and growth could be higher. However, there is also a possibility that agreements reached over the weekend might fail and the conflict could escalate again, leading to sustained high energy prices and larger economic drag.
