War with Iran Slows Down Germany’s Economy

The Bundesbank expects slower growth for the German economy due to the war with Iran. It now forecasts only minimal growth of 0.5 percent on a calendar-adjusted basis for the current year, making it even slightly more pessimistic than in December.

Six months ago, the central bank had predicted a calendar-adjusted 0.6 percent increase in real gross domestic product (GDP) for 2026. “The sharp rise in energy prices is dampening the purchasing power of private households and their consumer spending,” the Bundesbank stated on Friday. The energy price shock is driving up inflation. In addition, companies are being burdened by supply bottlenecks.

Only after the weak summer months could the economy gradually regain momentum, the Bundesbank writes. Therefore, growth of 0.8 percent is expected next year, which could then rise to 1.4 percent in 2028. However, the economy will continue to be weighed down by the shortage of skilled workers and high labor and energy costs.

Forecasts Lowered Across the Board

With its lowered forecast, the Bundesbank joins the chorus of pessimistic predictions for the German economy. Both the federal government and its advisory body, the “Wirtschaftsweisen,” expect a meager 0.5 percent economic growth this year. As early as 2025, Germany narrowly avoided a third consecutive year without growth, posting a minuscule increase of 0.2 percent.

War drives up inflation

Higher costs for energy sources such as oil and gas are also driving inflation upward: The Bundesbank expects a harmonized inflation rate (HICP) of 2.9 percent this year for European comparison purposes, which will then drop slightly to 2.7 percent in 2027 and not fall noticeably to 1.9 percent until 2028.

The Bundesbank also expects consequences for the labor market. According to its projections, employment is likely to decline slightly this year and then rise noticeably again starting in the middle of next year. The Bundesbank estimates that a contraction of the economy will be prevented by higher government spending—for example, on infrastructure—using the special funds worth billions.