By Maria Martinez BERLIN, April 22 (Reuters) - Germany's economy ministry on Wednesday slashed its growth forecasts for 2026 and 2027 and raised its inflation projections, as the Iran war drives up
Germany halves 2026 growth forecast, raises inflation outlook amid Iran war
By Maria Martinez
Germany's Economic Outlook and Government Response
BERLIN, April 22 (Reuters) - Germany's economy ministry cut its growth forecasts for 2026 and 2027 and raised its inflation projections on Wednesday, as the Iran war drives up oil and gas prices.
The government now expects 0.5% growth for 2026, down from an earlier projection of 1.0%, and cut its 2027 growth outlook to 0.9% from 1.3%, confirming a Reuters report last Thursday.
Modest Recovery Amid Geopolitical Headwinds
"The German economy is on a modest recovery path, but the headwinds have intensified," Economy Minister Katherina Reiche said. "The economic recovery expected for this year is once again being held back by external geopolitical shocks."
Inflation and Energy Prices
MINISTRY RAISES INFLATION OUTLOOK
The war in Iran is driving up energy and raw material prices, the minister said, placing financial strain on private households and increasing costs for Germany's economy.
The ministry now expects inflation to accelerate to 2.7% this year and 2.8% in 2027, up from 2.2% last year.
Further economic developments will depend to a large extent on how the conflict in the Middle East evolves and are subject to considerable uncertainty, the minister said.
Trade and Export Challenges
In addition to the war in Iran, international trade faces headwinds from protectionist measures and economic fragmentation, hindering Germany's export-oriented economy from leveraging foreign trade to boost growth.
Exports are not expected to rise on a year-over-year basis until 2027, when they are forecast to increase by 1.3%.
Imports are expected to grow faster, rising by 1.8% in 2027, which would narrow Germany's trade surplus.
Europe's largest economy has been struggling since the COVID-19 pandemic to regain momentum. Heightened competition from China and higher energy costs are posing significant challenges to its export-driven economic model.
International Relations
Reiche said she will travel to China in May to discuss key issues between the trading partners.
Fiscal Policy and Budget Implications
BAD NEWS FOR GROWTH, GOOD NEWS FOR THE BUDGET
Germany's constitutionally enshrined debt brake allows structural deficit spending of up to 0.35% of gross domestic product. Its cyclical component also permits additional borrowing during economic downturns.
Because the economic outlook has been downgraded, the government will be able to borrow an additional 2.7 billion euros ($3.17 billion) for its 2027 budget, as growth is now expected to be weaker than initially forecast.
Finance Minister Lars Klingbeil is aiming to complete the first draft of the 2027 budget by the end of this month.
Growth Drivers and Structural Challenges
GROWTH DRIVERS
Domestic Demand and Consumption
The recovery of the German economy is being driven primarily by domestic demand, Reiche said.
With rising real incomes, private consumption remains a pillar of the German economy despite the loss of purchasing power resulting from the energy price shock.
In nominal terms, consumption is expected to grow by 3.2% in 2026 and 3.3% in 2027. When adjusted for inflation, the increase is expected to be 0.4% this year and 0.5% in 2027.
Government Spending
Government spending, especially on infrastructure and defence, will contribute to the overall economic recovery, with 5.2% growth expected in public spending this year in nominal terms, or 2.0% when adjusted for inflation.
Structural Reforms Needed
Reiche defended the measures taken by the government to ease the pressure from rising energy prices.
"This helps in the short term, but it does not solve the structural causes of Germany's weak growth," Reiche added. "For an economy that can grow again and remain competitive, we also need far-reaching structural reforms."
Germany needs to tackle its excessively high taxes, reduce energy costs, and cut bureaucracy, she said, adding: "We hadn't done enough, even before the war."
The minister noted that Germany is once again near the bottom of the EU growth ranking, despite extensive fiscal impulses. "The weakness in growth is primarily structural in nature," Reiche said.
Exchange Rate
($1 = 0.8529 euros)
(Reporting by Maria Martinez, Christian Kraemer and Holger HansenEditing by Kirsti Knolle, Gareth Jones and Paul Simao)
