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Germany's economic growth slashed as Iran conflict spikes energy prices

A perfect storm of geopolitical tension and energy shocks derails Germany's recovery. Can bold reforms save households and industries from the fallout?

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2 min read
The image shows a black background with text that reads "Forecasting vs Predicting: Predicting is...
The image shows a black background with text that reads "Forecasting vs Predicting: Predicting is about certainty, and forecasting is about appreciating uncertainty." This text is likely referring to the concept of forecasting and predicting, which is the process of making decisions based on the uncertainty of the world.

Germany's economic growth slashed as Iran conflict spikes energy prices

Germany's economic outlook has darkened as rising energy prices linked to the Iran conflict force leading research institutes to slash growth forecasts. The spring joint economic report, produced by six institutes in Germany and Austria, now predicts far weaker expansion for 2026 and 2027. Policymakers face growing pressure to respond as households and industries grapple with surging costs. The conflict in Iran, which escalated on 28 February 2026 after US and Israeli strikes, triggered a blockade of the Strait of Hormuz. By late March, German electricity prices for new customers had jumped 11–17%, climbing from 23.6 to 26.12–27.6 cents per kilowatt-hour. This reversal wiped out earlier state-subsidised reductions, pushing prices back to levels last seen in October 2025. Wholesale gas prices also spiked by up to 64% to 59 €/MWh, while electricity wholesale rates rose 36% to 140 €/MWh, though some day-ahead spot prices dipped slightly due to renewable energy output.

The institutes now expect Germany's economic output to grow by just 0.6% in 2026—half the previous forecast—and 0.9% in 2027. Inflation is projected to remain elevated, with consumer prices rising by 2.8% in 2026 and 2.9% in 2027. Timo Wollmershäuser, head of economic research at Munich's ifo Institute, pointed directly to the energy price shock as the cause of the downturn. Structural issues, such as industrial electricity costs two to three times higher than in the US or China, have worsened under the strain.

In response, the institutes urge targeted social policies to protect vulnerable households from soaring energy bills. However, they warn against short-term state intervention to cap prices, arguing it would distort markets. Federal Economics Minister Katherina Reiche has called for 'bold reforms' to address the weakened growth prospects. The forecast will now form the basis for the government's own economic projections, due to be published on 22 April. The Middle East conflict has disrupted energy supplies, driving up costs and squeezing Germany's economic recovery. With growth forecasts cut sharply and inflation persisting, policymakers must balance immediate relief for households with long-term structural changes. The government's upcoming projections will determine how Berlin plans to navigate the crisis.

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