INA - SOURCES
The German government on Wednesday halved its economic growth forecast for this year, citing the energy shock stemming from the ongoing conflict in the Middle East as a severe blow to Europe's largest economy. The government noted that inflation has reached its highest level in two years.
The German Ministry of Economics stated that it now expects GDP growth of only 0.5% in 2026, down from its previous forecast of 1% in January. It also lowered its 2027 growth forecast to 0.9% from 1.3%.
These figures come after hopes that the Eurozone's traditional "growth engine" would regain momentum, buoyed by Chancellor Friedrich Merz's massive public spending campaign. However, the sharp rise in oil and gas prices since the outbreak of the conflict between the United States and Israel against Iran has driven up inflation and increased operating costs for manufacturers.
“Signs of a moderate recovery were emerging before the conflict, but the recent escalation has set us back economically and dealt a severe blow to Germany's structurally weak economy." She explained that "rising energy costs and increased borrowing costs since February have placed significant pressure on the economy," said Economy Minister Katarina Reich at a press conference.
German heavy industries, particularly the steel and chemical sectors, are grappling with a confluence of challenges, including the fallout from the war in Ukraine, US tariffs, Chinese competition, and supply chain disruptions that have delayed the delivery of essential products.
Domestically, Chancellor Merz is facing criticism from business groups despite announcing the possibility of tax-free bonuses of up to €1,000 for workers.
Peter Liebinger, head of the Federation of German Industries, urged the government to "focus on deep structural reforms in the health and pension sectors instead of relying solely on financial palliatives."
The inflation in Germany jumped to 2.7% in March, its highest level in over two years, further fueling frustration among both consumers and businesses.