Energy price shock from Iran war dampens Germany's economic recovery – economists
Clean Energy Wire / ntv
The energy price shock caused by the US and Israeli war on Iran and attacks on energy infrastructure in the Persian Gulf region is likely to dampen Germany’s economic recovery, said several of the country’s most important economic institutes in their joint economic forecast.
“The strong expansion in new debt for defence, infrastructure, and climate protection means an increase in government spending and, above all, bolsters companies in the defence industry and civil engineering,” said the institutes, including ifo and DIW. While the country could dodge a period of zero growth, the energy crisis, US tariff policy, and the associated uncertainty all are weighing on German exports and dampen prospects for recovery after years of economic woes.
Compared to the autumn 2025 report, the institutes have revised their forecast downward by 0.6 percentage points for the current year, with price-adjusted gross domestic product expected to grow by 0.6 percent in 2026.
High energy prices are being driven by damage to oil and gas infrastructure in Iran, Qatar, the United Arab Emirates, and other major fossil fuel producers in the region, as well as a blockade of the Strait of Hormuz shipping route. The International Energy Agency (IEA) has warned that it could take many months to restore oil and gas flows from the Gulf after hostilities end, and IEA chief Fatih Birol has said that the world is facing what could become the most severe energy crisis in history.
The economists called on the government to “resist the temptation to respond to acute spikes in energy prices with knee-jerk interventionism,” such as discounts on transport fuels for everyone, which would prevent necessary reductions in demand and take away incentives to conserve fossil fuels.
A package of regulatory measures introduced by the government to curb fuel price rises at the pump took effect on 1 April, including a ban on increasing prices more than once per day for petrol station operators. Steffen Bilger, head of the conservative Christian Democrats (CDU) parliamentary faction, told news outlet ntv that further measures could be introduced if the war drags on and prices stay elevated, including an increase of the commuter allowance. "But this won't help to bring prices at the pump down to a level again that we are used to," Bilger added.
The economic institute's forecast also assumes that energy prices will gradually fall again, but remain noticeably higher than before the outbreak of the Iran war “for a lengthy time,” leading to companies passing on the increased costs to consumers and triggering higher inflation. However, the economists emphasised significant uncertainties surrounding the development of the crisis, and thus its effects on energy prices, supply chains, and the economy as a whole.
Germany is particularly exposed to energy price shocks given its heavy reliance on imported fossil fuels – a vulnerability underscored by the 2022 gas crisis following Russia's invasion of Ukraine. The current turmoil has revived debate about the pace of Germany's shift to renewables and the role of gas as a transition fuel.
“Only an energy supply based on renewable energies can provide the necessary resilience for industry, open up a wide range of opportunities for innovation and contribute to sustaining prosperity in the long term,” said Frithjof Staiß, executive director of the Centre for Solar Energy and Hydrogen Research Baden-Württemberg (ZEW), presenting renewable power output data for early 2026.
Wind power, solar PV and other renewable energy sources covered 53 percent of total electricity consumption in the country in the first quarter of this year, ZEW and energy industry association BDEW said.
While the renewables share in electricity has been a success story of the energy transition (56% for the full year of 2025), electrification is still lagging in other sectors such as transport and heating. As a consequence, renewables only covered a little over 20 percent of total energy consumption in 2025.