Joint Economic Forecast Spring 2026: Energy price shock overshadows fiscal stimulus – Growth drivers dry up

Germany

The energy price shock triggered by the Iran war will push the inflation rate up to 2.9% in the second quarter of 2026 and erode private households’ purchasing power. Although this forecast assumes that energy prices will gradually fall again, they will remain noticeably higher than before the outbreak of the war for a lengthy time, meaning companies will pass on the increased energy costs. The inflation rate is expected to average 2.8% in 2026 and 2.9% in 2027. While rising energy prices are predominantly fueling inflation in the current year, in particular the delay in higher energy costs being passed on will make itself felt in the core inflation rate in the coming year. Consumer prices excluding energy will rise from an average of 2.4% in 2026 to 2.8% in 2027.

Overall, the energy price shock is likely to dampen the recovery in Germany, but not bring it to a complete standstill. This will be ensured by the significantly expansionary fiscal policy. This forecast does not assume any measures to compensate for the loss of purchasing power, such as a fuel discount. However, the strong expansion in new debt for defense, infrastructure, and climate protection means an increase in government spending and, above all, bolsters companies in the defense industry and civil engineering. In most of the manufacturing sector, the situation nevertheless remains subdued. While there are growing indications that exports are emerging from their trough and will strengthen somewhat in the course of the year, there will only be a low boost from foreign business for the time being: In addition to US tariff policy, rising energy prices and the associated uncertainty are weighing on German exports. As a result, domestic corporate investment will probably recover only gradually. In addition, like investment in residential construction, it is being held back by tighter financing conditions. 

All in all, price-adjusted gross domestic product in Germany is expected to increase by 0.6% in 2026 and by 0.9% in 2027, after economic output did little more than stagnate the previous year with an increase of 0.2 percent. The increase in economic output in the current and coming year is overstated by 0.2 and 0.1 percentage points, respectively, due to the high number of working days. Compared to the fall 2025 report, the institutes have thus significantly revised their forecast downward by 0.6 percentage points for the current year and by 0.4 percentage points for the coming year. 

Global Economy

The global economy is being hit by a strong energy price shock in the spring of 2026. The military conflict in the Persian Gulf has largely blocked the Strait of Hormuz, a critical transportation artery for energy supplies worldwide. Since around one-fifth of the world’s crude oil production and LNG production is concentrated in this region, the restricted transport capacities have led to a sharp rise in energy prices and heightened volatility in commodity and financial markets. The price of Brent crude oil surpassed the USD 100 mark; in January, it had stood at USD 65. At the same time, the gas price in Europe (Dutch TTF) doubled at one stage to 60 EUR/MWh. In their forecast, the institutions assume that the Strait of Hormuz will become fully navigable again during the second quarter and that, in the second half of the year, exports of oil and liquefied natural gas from the region will gradually return to pre-war levels. In line with futures market prices, it is assumed that while energy prices will begin to fall again starting in the summer, they will still be noticeably higher at the end of the forecast period than they were before the war broke out. 

Under such conditions, the conflict’s impact on global inflation will be clearly felt, but will not be drastic, and the drag on global production will be limited and temporary. The pace of expansion is expected to pick up again from the second half of 2026 onward, also because the energy price shock is occurring against the backdrop of a global economy that has proven remarkably robust in recent years. For instance, global production expanded at a virtually unchanged pace in 2025, despite significantly higher US tariffs. Boosts from the technology sector, which is increasingly proving to be a key driver of the global economy, also contributed to this. In addition to the US the advanced Asian economies, particularly Taiwan and South Korea, are benefiting from this. Since it is predominantly the case that fiscal policy in the advanced economies is slightly expansionary, the conditions for a continuation of robust global economic expansion remain intact. 

All in all, the institutes expect global growth rates in global production of 2.5% in both 2026 and 2027. The war in the Middle East will weigh on economic activity, especially in the first half of 2026.  This is expected to depress the annual result by about 0.3 percent. Despite the new burdens from the rise in energy prices, the institutes are revising their forecast for 2026 upward by 0.2 percentage points compared to the fall of 2025. This is primarily due to the fact that US tariff policy is weighing less heavily on the global economy than expected in the fall, a trend also reflected in the higher growth rate in global production in 2025. In the US in particular, the dampening effects appear to be lower. 

Following a downturn that lasted several years, a recovery began in Germany during the past year. Underutilization of overall economic capacities gradually declined, and the order situation in manufacturing improved. The course of the economic turnaround was atypical for the German economy. While export-oriented industry struggled to make headway amid further declines in competitiveness, high geopolitical uncertainty, and persistent trade policy burdens, the recovery was driven largely by the domestic economy. Private consumption experienced a boost, underpinned by strong income growth and receding inflation. In the fourth quarter, government investment spending and consumption expenditure also imparted significant stimuli. Accordingly, the order situation has improved so far, especially for companies in economic sectors that benefit directly from higher spending on defense and infrastructure.

The energy price shock triggered by the Iran war will push the inflation rate up to 2.9% in the second quarter of 2026 and erode private households’ purchasing power. Although this forecast assumes that energy prices will gradually fall again, they will remain noticeably higher than before the outbreak of the war for a lengthy time, meaning companies will pass on the increased energy costs. The inflation rate is expected to average 2.8% in 2026 and 2.9% in 2027. While rising energy prices are predominantly fueling inflation in the current year, in particular the delay in higher energy costs being passed on will make itself felt in the core inflation rate in the coming year. Consumer prices excluding energy will rise from an average of 2.4% in 2026 to 2.8% in 2027.

Overall, the energy price shock will dampen the recovery in Germany, but is not likely to bring it to a complete standstill. This will be ensured by the significantly expansionary fiscal policy. This forecast does not assume any measures to compensate for the loss of purchasing power, such as a fuel discount. However, the strong expansion in new debt for defense, infrastructure, and climate protection means an increase in government spending and, above all, bolsters companies in the defense industry and civil engineering.

In most of the manufacturing sector, the situation nevertheless remains subdued. While there are growing indications that exports are emerging from their trough and will strengthen somewhat in the course of the year, there will only be a low boost from foreign business for the time being: In addition to US tariff policy, rising energy prices and the associated uncertainty are weighing on German exports. As a result, domestic corporate investment will probably recover only gradually. In addition, like investment in residential construction, it is being held back by tighter financing conditions.  

All in all, price-adjusted gross domestic product in Germany is expected to increase by 0.6% in 2026 and by 0.9% in 2027, after economic output did little more than stagnate the previous year with an increase of 0.2 percent. The increase in economic output in the current and coming year is overstated by 0.2 and 0.1 percentage points, respectively, due to the higher number of working days. Compared to the fall 2025 report, the institutes have thus significantly revised their forecast downward by 0.6 percentage points for the current year and by 0.4 percentage points for the coming year. 

On the one hand, the dampening effects of higher energy prices contribute to that. Overall, the energy price shock underlying this forecast will probably reduce the increase in economic output by about 0.3 percentage points in both the current and coming years. On the other hand, this also reflects a reevaluation of structural factors, resulting in the assessment that industrial momentum will be weaker. This is the primary reason why gross value added in the manufacturing sector, goods exports, and corporate investment are noticeably lower in the current forecast than estimated in the fall. By contrast, the expansionary fiscal stimulus is estimated to be stronger than in the fall report, particularly in 2027, as greater disbursements from the special funds and lower consolidation efforts are anticipated. This in itself will push up the increase in economic output in the coming year. The bottom line is that the overall economic recovery will continue after a damper in the first half of the year. Compared to the fall report, however, the pace of the recovery is noticeably slower.

Due to the expansionary fiscal policy, the public budget deficit will rise from 2.7% of gross domestic product in 2025 to 3.7% in 2026 and 4.2% in 2027. Gross debt will increase over the same period from 63.6% to 67.2% of economic output.

Cyclical and structural factors continue to compound each other in the labor market. The overall economic recovery is not expected to become visible until next year and with a delay. The institutes therefore anticipate a further decline in employment this year of 100,000 as an average for the year, followed by an increase of 42,000 in 2027. Conversely, the number of unemployed will increase by 54,000 in 2026 and decrease by 66,000 the following year. According to the forecast, the unemployment rate will rise to 6.4% this year before falling to 6.2% next year.

Potential growth will come to a standstill in the medium term. Due to the demographic-driven shortage of labor supply and the merely weak increase in the labor productivity trend, the potential growth rate will fall from its currently estimated level of 0.2% to 0.0% by the end of the decade. Against this backdrop, the scope for expansion is likely to be exhausted in 2027 as the utilization of overall production capacities increases.

The global economy is being hit by a strong energy price shock in the spring of 2026. The military conflict in the Persian Gulf has largely blocked the Strait of Hormuz, a critical transportation artery for energy supplies worldwide. Since around one-fifth of the world’s crude oil production and LNG production is concentrated in this region, the restricted transport capacities have led to a sharp rise in energy prices and heightened volatility in commodity and financial markets. The price of Brent crude oil surpassed the USD 100 mark; in January, it had stood at USD 65. At the same time, the gas price in Europe (Dutch TTF) doubled at one stage to 60 EUR/MWh. In their forecast, the institutions assume that the Strait of Hormuz will become fully navigable again during the second quarter and that, in the second half of the year, exports of oil and liquefied natural gas from the region will gradually return to pre-war levels. In line with futures market prices, it is assumed that while energy prices will begin to fall again starting in the summer, they will still be noticeably higher at the end of the forecast period than they were before the war broke out. 

Under such conditions, the conflict’s impact on global inflation will be clearly felt, but will not be drastic, and the drag on global production will be limited and temporary. The pace of expansion is expected to pick up again from the second half of 2026 onward, also because the energy price shock is occurring against the backdrop of a global economy that has proven remarkably robust in recent years. For instance, global production expanded at a virtually unchanged pace in 2025, despite significantly higher US tariffs. Boosts from the technology sector, which is increasingly proving to be a key driver of the global economy, also contributed to this. In addition to the US the advanced Asian economies, particularly Taiwan and South Korea, are benefiting from this. Since it is predominantly the case that fiscal policy in the advanced economies is slightly expansionary, the conditions for a continuation of robust global economic expansion remain intact. 

All in all, the institutes expect global growth rates in global production of 2.5% in both 2026 and 2027. The war in the Middle East will weigh on economic activity, especially in the first half of 2026.  This is expected to depress the annual result by about 0.3 percent. Despite the new burdens from the rise in energy prices, the institutes are revising their forecast for 2026 upward by 0.2 percentage points compared to the fall of 2025. This is primarily due to the fact that US tariff policy is weighing less heavily on the global economy than expected in the fall, a trend also reflected in the higher growth rate in global production in 2025. In the US in particular, the dampening effects appear to be lower. 

Following a downturn that lasted several years, a recovery began in Germany during the past year. Underutilization of overall economic capacities gradually declined, and the order situation in manufacturing improved. The course of the economic turnaround was atypical for the German economy. While export-oriented industry struggled to make headway amid further declines in competitiveness, high geopolitical uncertainty, and persistent trade policy burdens, the recovery was driven largely by the domestic economy. Private consumption experienced a boost, underpinned by strong income growth and receding inflation. In the fourth quarter, government investment spending and consumption expenditure also imparted significant stimuli. Accordingly, the order situation has improved so far, especially for companies in economic sectors that benefit directly from higher spending on defense and infrastructure.

The energy price shock triggered by the Iran war will push the inflation rate up to 2.9% in the second quarter of 2026 and erode private households’ purchasing power. Although this forecast assumes that energy prices will gradually fall again, they will remain noticeably higher than before the outbreak of the war for a lengthy time, meaning companies will pass on the increased energy costs. The inflation rate is expected to average 2.8% in 2026 and 2.9% in 2027. While rising energy prices are predominantly fueling inflation in the current year, in particular the delay in higher energy costs being passed on will make itself felt in the core inflation rate in the coming year. Consumer prices excluding energy will rise from an average of 2.4% in 2026 to 2.8% in 2027.

Overall, the energy price shock will dampen the recovery in Germany, but is not likely to bring it to a complete standstill. This will be ensured by the significantly expansionary fiscal policy. This forecast does not assume any measures to compensate for the loss of purchasing power, such as a fuel discount. However, the strong expansion in new debt for defense, infrastructure, and climate protection means an increase in government spending and, above all, bolsters companies in the defense industry and civil engineering.

In most of the manufacturing sector, the situation nevertheless remains subdued. While there are growing indications that exports are emerging from their trough and will strengthen somewhat in the course of the year, there will only be a low boost from foreign business for the time being: In addition to US tariff policy, rising energy prices and the associated uncertainty are weighing on German exports. As a result, domestic corporate investment will probably recover only gradually. In addition, like investment in residential construction, it is being held back by tighter financing conditions.  

All in all, price-adjusted gross domestic product in Germany is expected to increase by 0.6% in 2026 and by 0.9% in 2027, after economic output did little more than stagnate the previous year with an increase of 0.2 percent. The increase in economic output in the current and coming year is overstated by 0.2 and 0.1 percentage points, respectively, due to the higher number of working days. Compared to the fall 2025 report, the institutes have thus significantly revised their forecast downward by 0.6 percentage points for the current year and by 0.4 percentage points for the coming year. 

On the one hand, the dampening effects of higher energy prices contribute to that. Overall, the energy price shock underlying this forecast will probably reduce the increase in economic output by about 0.3 percentage points in both the current and coming years. On the other hand, this also reflects a reevaluation of structural factors, resulting in the assessment that industrial momentum will be weaker. This is the primary reason why gross value added in the manufacturing sector, goods exports, and corporate investment are noticeably lower in the current forecast than estimated in the fall. By contrast, the expansionary fiscal stimulus is estimated to be stronger than in the fall report, particularly in 2027, as greater disbursements from the special funds and lower consolidation efforts are anticipated. This in itself will push up the increase in economic output in the coming year. The bottom line is that the overall economic recovery will continue after a damper in the first half of the year. Compared to the fall report, however, the pace of the recovery is noticeably slower.

Due to the expansionary fiscal policy, the public budget deficit will rise from 2.7% of gross domestic product in 2025 to 3.7% in 2026 and 4.2% in 2027. Gross debt will increase over the same period from 63.6% to 67.2% of economic output.

Cyclical and structural factors continue to compound each other in the labor market. The overall economic recovery is not expected to become visible until next year and with a delay. The institutes therefore anticipate a further decline in employment this year of 100,000 as an average for the year, followed by an increase of 42,000 in 2027. Conversely, the number of unemployed will increase by 54,000 in 2026 and decrease by 66,000 the following year. According to the forecast, the unemployment rate will rise to 6.4% this year before falling to 6.2% next year.

Potential growth will come to a standstill in the medium term. Due to the demographic-driven shortage of labor supply and the merely weak increase in the labor productivity trend, the potential growth rate will fall from its currently estimated level of 0.2% to 0.0% by the end of the decade. Against this backdrop, the scope for expansion is likely to be exhausted in 2027 as the utilization of overall production capacities increases.

Risiks

The focus topic examines the causes of the decline in hours worked per person in employment and the implications for potential growth in the coming years. By international standards, Germany has a low average number of hours worked per person in employment. A key reason for this is the high part-time employment rate. This is accompanied by high labor market participation of groups that work part-time with above-average frequency. In addition to women, men are also increasingly reducing their working hours for family-related reasons. Added to this are structural shifts in the labor market, in particular employment growth in sectors with below-average working hours, such as health and social services, as well as a decline in employment in industry, which is characterized by above-average working hours. Finally, the repercussions of demographic change are also making themselves felt. Not least as a result of pension reforms, the duration of working life has increased more strongly in recent decades than in other countries. Increasing labor market participation among older age groups with below-average weekly working hours is causing a fall in the average working hours per person in employment. Looking ahead to the coming years, demographic change is likely to further reduce the volume of work and thus noticeably dampen the growth in potential output. In the process, there will be a shift in the driving forces. While the significant effect of increasing labor market participation by women in recent decades has become less important, the fact that elderly workers account for an increasing share of the total number of hours worked is having a stronger impact. 

The greatest risks to this forecast stem from how the Iran war pans out. This report assumes that the immediate economic effects of the war will initially be felt primarily in the form of higher energy prices. The analysis is based on market expectations as of March 20, 2026, as to how energy prices will develop. However, recent weeks have shown that individual events in the war strongly influence both spot and forward prices. Accordingly, the economic consequences of the energy price shock may be more or less severe, depending on the course of the war. Under an alternative scenario simulated in this report, noticeably higher energy prices could dampen the rise in economic output in Germany this year and next by an additional 0.2 and 0.3 percentage points, respectively. The repercussions for the real economy could be even greater if the conflict in the Middle East – contrary to the assumptions in these model simulations – spreads to other countries or has a stronger impact on financial markets. In addition to higher energy prices, if the conflict escalates further and the Strait of Hormuz is closed for a lengthy time, there is the risk that supply chain problems and associated production constraints could also occur in Germany. 

Furthermore, there are still significant uncertainties regarding the effects of structural change, particularly in manufacturing, in this forecast. Gross value added, production, exports, investment, and employment in what was once the engine of the economy have been declining in recent years. It is unclear to what extent this is due to temporary cyclical factors and to what extent to permanent structural factors. While this forecast expects industrial activity to expand by mid-2026 at the latest, a strong upturn – such as was observed in previous phases of macroeconomic recovery – is being hindered by a noticeable decline in competitiveness. Consequently, some of the production capacities are likely to have become obsolete in recent years. However, the scope for recovery in industry could also be far greater if the decline in production capacities has been overestimated. That means a normalization of capacity utilization could be accompanied by a stronger upturn in industrial activity.

Economic policy faces a dual challenge in the current situation: While there has been an urgent need to take action for years now in light of the weak level of growth, it is also necessary to resist the temptation to respond to acute spikes in energy prices with knee-jerk interventionism. A fuel discount may initially lower the domestic retail price of fuels, insofar as it is passed on to consumers. However, this distorts the price signal, preventing necessary reductions in demand. As a result, global demand for crude oil rises, further driving up world market prices. Overall, this reduces incentives to conserve fossil fuels, and the government’s financial costs would ultimately benefit – even in the short term – not domestic consumers but, not least, foreign suppliers. The greater share a country accounts for demand in the respective global markets, the more significant this effect becomes. Such interventions should therefore be avoided throughout the EU where possible. Assistance to cushion higher energy costs motivated by social policy concerns is best provided in the form of non-earmarked transfers. One option, for example, might be to adjust the standard rates of basic income support during the year to reflect higher costs of living. Growth policy should focus on rigorously removing regulatory curbs on voluntary economic activity so that potential reserves can be leveraged. This applies to all potential-related factors and thus, in addition to investment and innovation conditions, not least with regard to work incentives.