The Munich Ifo Institute has cut its growth forecast after taking the Middle‑East war into account. A short‑term rise in energy prices would slow the economy this year by about 0.2 percentage points compared with pre‑war estimates, leaving the institute expecting 0.8 % growth this year and 1.2 % next year.
Ifo’s chief economist, Timo Wollmershäuser, said that inflation is expected to climb to almost 2.5 % if oil and gas prices fall again in the coming weeks. If fossil‑energy prices stay sharply higher for a longer period, peak inflation could reach close to 3 %. That would drag growth down further to 0.6 % this year and 0.8 % next year.
Against this backdrop, the institute sees a recovery turning on by the end of 2025, driven by a strong rise in real GDP, higher overall capacity utilisation and noticeably better orders in construction and industry. Wollmershäuser notes that the rebound is not export‑driven; instead, exports have continued to decline even as domestic demand has increased. The recovery is largely the result of domestic stimulus linked to a more expansionary fiscal stance, with government spending on infrastructure, climate neutrality and defence expanding and becoming more demand‑driven. In the fourth quarter of 2025, public procurement and consumer spending rose sharply.
The labour market will feel this slowdown a bit later. In all scenarios the unemployment rate in 2027 is projected to be lower than in 2026. Wollmershäuser said that the timing of a reversal in trends will again depend on how long the fighting in the Middle East lasts and the accompanying economic uncertainty. Employment is expected to fall again this year but to rise again next year as the economy recovers.
