Iran conflict threatens to stall Germany's economic growth, IMK says

A prolonged Iran war could bring German economic growth close to a standstill this year, the IMK institute said on Thursday.

If the conflict in the Middle East drags on or escalates, gross domestic product would grow by just 0.2%, the Macroeconomic Policy Institute (IMK) said in a risk scenario. The economy would then expand by 1.4% next year.

In December, IMK economists had projected growth of 1.2% for 2026.

"In February, we were still thinking about raising our 2026 forecast because the signals were becoming increasingly positive," IMK director Sebastian Dullien said. "The economic effects of the war are now at least partly spoiling that and, in the worst case, could intensify the risk of deindustrialisation in Germany."

In its main scenario, IMK forecasts growth of 0.9% in 2026, assuming the war does not last beyond the summer and higher energy prices ease. On that basis, the economy would grow by 1.6% in 2027.

The institute expects the current rise in energy prices to recede by the end of the year, allowing the positive effects of public investment and private consumption to outweigh the drag from the second half onward.

Inflation would then average 2.4% in 2026 before falling to 1.7% in 2027. In the risk scenario, by contrast, inflation would rise to 3.1% this year.

-Reporting by Klaus Lauer, writing by Maria Martinez, editing by Friederike Heine/Reuters