The Ifo Institute in Munich has lowered its growth forecast because of the war in the Middle East. A short‑term rise in energy prices would slow this year’s GDP growth by roughly 0.2 percentage points compared with pre‑war estimates, leaving the institute predicting 0.8 % growth for this year and 1.2 % next year.
“We expect the inflation rate to climb to just under 2.5 % if oil and gas prices fall again within the coming weeks” said Ifo’s chief economist Timo Wollmershäuser. “However, if fossil‑fuel prices remain sharply higher at around today’s levels for a longer period, inflation could peak at nearly 3 %”. In that scenario, growth would be cut by another 0.2 percentage points to only 0.6 % this year and by 0.4 percentage points to 0.8 % next year.
According to the institute, the German economy is set to recover by the end of 2025. This outlook is supported not only by a strong rise in real GDP and increasing overall capacity utilisation, but also by a markedly better order book in the construction industry and in manufacturing. “Even with the energy‑price shock, the recovery in Germany should continue later this year, especially as public spending on infrastructure, climate neutrality and defence expands and starts to have a demand‑side impact” Wollmershäuser added.
The recovery, however, is atypical for Germany, he said, because it is not driven by export activities. On the contrary, exports have continued to fall even as domestic output has returned to its pre‑shock levels. Instead, the rebound has been propelled by domestic impulses linked to the increasingly expansionary fiscal stance: in Q4 2025, especially state‑backed equipment investment and public consumption spending saw a sharp increase.
The labour market will feel the economic recovery a bit later. In all scenarios, the unemployment rate in 2027 is projected to be lower than in 2026. “When the trend reversal will occur depends again on the length of the fighting in the Middle East and the accompanying economic uncertainty” Wollmershäuser said. He also noted that the number of employed persons will fall again this year but should rise in the following year as the recovery takes hold.