Globally rising energy prices in the wake of the new Gulf War are clouding the outlook for the German economy. Nevertheless, increased public expenditure is expected to support economic activity both this year and next. According to the spring forecast of the Halle Institute for Economic Research (IWH), output is projected to grow by 0.7% in 2026 and by 1.0% in 2027. We expect similar rates of expansion for East Germany. In December, the IWH economists had predicted growth of 1.0% for both 2026 and 2027.
Key Facts for Germany
In spring 2026, the global economy is entering turbulent waters, as the outbreak of war in the Gulf has driven the price of Brent crude above 100 U.S. dollars per barrel. This price shock is hitting a world economy that has thus far proved remarkably resilient in the face of sharp U.S. tariff increases – a resilience that extends to global trade and, in particular, to China’s export industry.
In the United States, economic activity is being propelled by investments in the tech sector, and key interest rates are expected to decline. In addition, fiscal policy in the U.S. – as well as in Germany and Japan – is expansionary this year.
In the euro area, momentum remains modest, but it continues to be supported by rising real wages and relatively favourable financing conditions. This forecast assumes that energy prices will fall significantly in the second half of 2026. Global output is projected to grow by 2.6% in both 2026 and the following year.
Real Gross Domestic Product in Germany
The Gulf War is worsening the outlook for the German economy as well: Rising energy prices will be weighing on household incomes and pushing up production costs. But this forecast assumes that prices will fall again in the second half of 2026. Under these conditions, the effect on German inflation in 2026 amounts to roughly 0.5 percentage points, and the drag on real economic activity remains limited.
Economic growth this year and next will be supported by higher public spending on defense and infrastructure investment. Thereafter, however, fiscal policy will need to shift toward consolidation. Additional support for the economy this year is likely to come from stabilizing exports, as no further renewed headwinds from U.S. tariff policy are expected and the global economy is projected to remain robust.
In the first half of 2026, however, the recovery is likely to be subdued, partly because higher energy costs will dampen private consumption, and cold weather at the beginning of the year is expected to curb construction activity in the first quarter. In the second half of the year, the recovery should gain somewhat more momentum.
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