Germany’s economy, the European “engine”, slows down: the war in Iran accelerates inflation and growth expectations fall

The private sectors trust the government to implement an expansionary fiscal policy.

Germany grew just 0.2% in 2025 after two years of recession. It is expected to gain a little more momentum in 2027 with growth of 0.9%, also below previous forecasts of 1.4%.

This year there is expected to be a decrease in energy prices, thanks to an agreement that ends the war launched by Israel and the US against Iran. But prices will remain higher than before the war for a long period, experts estimate.

As for inflation, an average of 2.4% is expected this year and 2.8% in 2027.

A necessarily expansive policy, it will increase to 2.7% of the Gross Domestic Product (GDP) this year and will climb to 6.4% next, declining slightly to 6.2% in 2027. It will also increase the budget deficit, expected to 4.2% for next year.

Germany is also the most populous country in the European Union, with 83 million inhabitants, 1% of the world’s population.

This year there is a risk of a recession occurring in two consecutive quarters. Salaries could suffer a drop in purchasing power. 64% of Germans consider the direction of the economy negatively.

Repeated domestic shocks, in part stimulated by increases in energy prices due to the war that does not end as Trump promises, may slow the recovery.

Germany must face important challenges, after the serious crises it has suffered in recent years. Also the Russian invasion of Ukraine and the four years of war have affected the country that had achieved a prosperity boom by buying very cheap Russian oil.

Key industrial sectors such as the chemical and automotive industries have been particularly hard hit by the crisis, causing a net weakness in demand and an increase in energy costs.

Despite positive forecasts in 2026 and 2027, experts are skeptical about the sustainable development of the German economy. Geraldine Dany Knedik of the German Institute for Economic Research states that “the German economy remains on shaky ground. Although it will manage to improve in the next two years, this boost will not last long due to persistent structural weaknesses.”

Experts’ skepticism is supported by the awareness that the expected growth is mainly due to government investment programs and not to a substantial improvement in the competitiveness of the German economy. They warn that without radical structural reforms, the positive push will be short-lived.

The German economy suffers from structural challenges that threaten long-term competitiveness. A key problem is the high cost of energy and unit work. German industrial consumers They pay up to five times more for gas and 1.5 to 2.5 times more for electricity, compared to their main geopolitical competitors.. German products are less competitive in global markets and companies tend to always divert more investments abroad.