BERLIN: Chancellor Friedrich Merz’s bid for a meaningful rebound in 2026 is getting harder to deliver by the week, despite the huge stimulus flowing into Europe’s biggest economy.
With the war in the Middle East stoking energy costs, igniting inflation and hurting confidence, Germany’s long-awaited nascent recovery is already souring.
That’s what growth data this week may begin to hint at, just days after the government halved its outlook for the year.
“We don’t expect the war in Iran to push the German economy back into recession – but the risk is rising,” said Geraldine Dany-Knedlik, an economist at research institute DIW Berlin.
“The gravity of the economic slowdown will depend largely on how long global oil and gas supplies remain constrained.”
The conflict has abruptly overshadowed what Merz deemed a “year of growth” that was meant to start a new chapter for Germany.
The longer energy supplies snarl up at the Strait of Hormuz, the greater the chance that the impact of Berlin’s debt-fuelled spending totaling hundreds of billions of euros will end up blunted.
That’s a concern not just for the country but also for Europe, given the economy’s importance as a traditional driver of growth throughout the region.
Recent business surveys illustrated how weakening activity in Germany driven by the Iran war weighed on the wider euro zone in April.
The Ifo Institute survey of business confidence released last Friday suggests the fallout is spreading, with an expectations index dropping to the lowest since 2023.
The numbers this Thursday will reveal how much the economy grew in the first quarter (1Q) – a period that ended with the first month of the conflict.
Last week, the Bundesbank said gross domestic product probably rose “modestly” during the period. Economists in a Bloomberg poll reckon it increased 0.2%, down from 0.3% at the end of 2025.
Bloomberg economist Martin Ademmer said the further decline in business sentiment among German firms in April supports the view of very weak activity in the 2Q.
“Together with likely only marginal expansion in the 1Q, this may keep annual growth this year at around 0.3%, similar to 2025, as the drag from the energy shock offsets much of the expected support from fiscal policy.”
Data on Wednesday, meanwhile, will highlight one of the key pressures in the economy. The report on German inflation for April may show acceleration to 3.1%, the fastest since early 2024. Price growth in the euro zone as a whole, due the following day, is seen quickening to 3%.
The spectre of inflation could ultimately force policymakers to act.
While European Central Bank officials are leaning toward no change at their decision on Thursday, an interest-rate increase in due course could ultimately act as a further brake on the economy.
The impact of the war prompted Berlin last week to warn of much weaker growth than anticipated, with the Economy Ministry’s growth prediction for 2026 halved to just 0.5%.
While that’s an improvement on expansion of just 0.2% last year, it’s still feeble compared with Germany’s pre-pandemic history. Before the downturn of 2020, the last time the economy grew less than 1% was in 2013.
“Rising energy prices have hit Germany at the worst possible time,” Deutsche Bank AG chief executive officer (CEO) Christian Sewing told reporters last week. “The economy had just begun to pick up momentum.”
The extent that prospects for growth are dimming is all the more remarkable considering the size of stimulus coming online.
Since Merz took power last year, a €500bil special infrastructure fund was created to fix the nation’s ailing schools, roads and trains, while military investments have been ramped up too.
“The German economy would be shrinking already if we didn’t have this stimulus,” Ifo president Clemens Fuest told Bloomberg TV last Friday.
The spending splurge helped German stocks outperform rivals, though they’re now lagging the wider European market this year. — Bloomberg
