ifo Economic Forecast Spring 2026: The Fallout from the Iran war is Dampening the Recovery

By the end of 2025, the German economy had embarked on a path to recovery, spurred by an increasingly expansionary fiscal policy. This recovery is likely to continue this year and next, although it will be dampened by the sharp rise in crude oil and natural gas prices following the outbreak of the war in Iran. To take appropriate account of the high level of uncertainty regarding the future course of energy prices, two scenarios for the possible future development of the German and international economies were considered for this forecast. Whilst the de-escalation scenario anticipates a swift end to the conflict and only temporary rises in crude oil and natural gas prices, the escalation scenario assumes a significantly longer conflict with a sharper and more persistent rise in energy prices. In the de-escalation scenario, price-adjusted gross domestic product is expected to grow by 0.8 percent this year and by 1.2 percent next year. This is in line with the ifo economic forecast from winter 2025. Without the energy price shock, however, there would have been a slight upward revision of the forecast for the current year to 1.0 percent, as the effects of fiscal measures in the defence sector are taking hold somewhat faster than originally expected. Accordingly, the consequences of the war with Iran reduce growth in the de-escalation scenario by 0.2 percentage points this year. In the escalation scenario, the economic headwinds increase noticeably and amount to 0.8 percentage points this year and next compared with the pre-war scenario. However, with inflation-adjusted gross domestic product rising by just 0.6 percent and 0.8 percent this year and next, the recovery will continue over the forecast period, albeit at a slower pace.