Germany risks recession as Iran energy shock hits growth, DIW economists say
Germany's economic recovery is losing momentum as rising energy prices linked to the conflict in Iran threaten to push Europe's largest economy into a technical recession, according to new forecasts from the Deutsches Institut für Wirtschaftsforschung (DIW Berlin), or German Institute for Economic Research.
The economic institute has sharply reduced its growth outlook, now expecting Germany's economy to expand by just 0.5% in 2026 and 0.8% in 2027. Both figures are around half a percentage point lower than the forecasts released earlier this year.
DIW economists warned that economic output is likely to decline slightly during both the second and third quarters of 2026 before stabilizing later in the year. If the economy contracts for two consecutive quarters, Germany would meet the commonly accepted definition of a technical recession.
According to the institute, the conflict-related surge in oil and gas prices is increasing inflationary pressure across the country. Higher energy costs are reducing household purchasing power, making everyday expenses more expensive and weakening consumer confidence.
Businesses are also facing growing uncertainty as energy costs rise. Economists believe this combination of weaker consumer spending and cautious business activity could further slow economic growth during the coming months.
DIW now expects inflation to reach 2.9% in 2026 and rise to 3.0% in 2027, remaining above the European Central Bank's target rate of 2%. Persistent inflation could make it more difficult for households and companies to recover from recent economic challenges.
Despite the warning signs, DIW's forecasting chief, Geraldine Dany-Knedlik, said the current situation is not expected to develop into a crisis on the scale of the 2022–2023 energy shock that followed Russia's full-scale invasion of Ukraine. She noted that Germany's energy supplies remain secure and that the country is now less dependent on fossil fuel imports than it was during that earlier crisis.
While the outlook remains challenging, economists believe the economy could stabilize toward the end of the year. However, much will depend on future developments in global energy markets and whether energy prices continue to rise as tensions in the Middle East persist.