Germany cuts this year’s growth forecast in half because of the Iran war

The German economy is expected to grow by 0.5 percent this year, the country’s economy ministry announced on Wednesday, according to Bloomberg.

This is less than the January forecast, where growth was estimated at 1.0 percent.

The ministry also lowered its growth forecast for next year to 0.9 percent from the previous 1.3 percent.

“The economic recovery expected for this year will slow down again due to external geopolitical shocks”, Minister of Economy Katherina Reiche said in an emailed statement ahead of a press conference in Berlin.

“The war in Iran is driving up the prices of energy and raw materials. This is straining households and increasing costs.”

The deteriorating operating environment increases the pressure on the Chancellor Friedrich Merzille and to his fragmented governing coalition. The conservative leader has built his government’s program on reviving Europe’s largest economy, but has faced difficulties in his efforts to reform the welfare system, which is taking an increasingly large share of the country’s resources.

Merz and his finance minister representing the centre-left social democrats Lars Klingbeil are negotiating significant benefit cuts for Germans in an effort to close a budget deficit of 140 billion euros by 2029.

“Since both parties are close to record lows in opinion polls and the far-right Alternative for Germany party is gathering support from disgruntled workers, the chancellor and the finance minister have little leeway to reach a compromise,” writes Bloomberg’s review.

The situation will become even more difficult when slower-than-expected economic growth weakens tax revenues and increases spending on supporting the unemployed, whose number has gradually increased over the past four years.