BERLIN, April 1 (Xinhua) -- The energy price shock triggered by tensions in the Middle East is weighing heavily on Europe's largest economy, with five leading German economic institutes on Wednesday slashing their forecasts of 2026 growth to just 0.6 percent.
In their joint autumn report last year, the institutes had projected a growth of 1.3 percent for 2026. They forecast the economy to grow 0.9 percent in 2027, down from a previous projection of 1.4 percent.
After several years of downturn, Germany's economy had begun to show signs of a cyclical recovery over the past year, with slack in overall economic capacity gradually diminishing, the latest report said. However, the export-oriented industrial sector continues to struggle with eroding competitiveness, persistent U.S. tariff pressures and heightened geopolitical uncertainty.
While easing inflation had been expected to underpin consumer spending and support a domestically driven recovery, the recent surge in energy prices now threatens to reverse much of that momentum, the institutes said.
They projected the energy price shock would push inflation to 2.9 percent in the second quarter of 2026, squeezing household purchasing power and putting the brake on the recovery. For the full year of 2026 and 2027, annual inflation is expected to reach 2.8 percent and 2.9 percent, respectively, up from earlier projections of 2 percent and 2.3 percent.
"The energy price shock is hitting the recovery hard," said Timo Wollmershaeuser, head of forecasts at the ifo Institute, adding that expansionary fiscal policy is helping to cushion the downside.
Government spending on defense and infrastructure is expected to shore up domestic demand. Even so, the institutes cautioned that external demand would remain weak, with exports only gradually stabilizing amid trade tensions and elevated uncertainty.
The institute also warned that the energy price shock is unlikely to fade quickly. Even as energy prices ease gradually, they would remain well above pre-conflict levels for an extended period, with the delayed pass-through of higher energy costs set to weigh on the economy into next year. ■
