German government plans economic stimulus as Iran war hammers growth forecasts

Germany’s Economy Ministry has slashed its 2026 GDP growth forecast to 0.5%, down from a prior estimate of 1%. The culprit is the ongoing Iran war, which has sent energy prices sharply higher and rattled business confidence across Europe’s largest economy.

Economy Minister Katherina Reiche put it plainly: the upheaval in the Middle East has set Germany back significantly. The country’s 2027 outlook has also been trimmed, falling to 0.9% from an earlier projection of 1.3%.

Why Germany is hurting more than most

The closure of the Strait of Hormuz in early March 2026 was the inflection point. That single chokepoint handles a substantial share of global liquefied natural gas shipments, and its disruption sent TTF gas prices, Europe’s benchmark, toward €60 per megawatt-hour.

The ifo Institute estimates the energy shock alone could shave up to 0.8 percentage points off German growth if the conflict continues to escalate. In an economy already forecast to grow at just 0.5%, that’s the difference between a weak recovery and a contraction.

DIHK, Germany’s chamber of commerce and industry association, is even more pessimistic. Its revised 2026 forecast puts growth at just 0.3%, down from an earlier estimate of 1%. Business sentiment, DIHK notes, has fallen to levels last seen during the pandemic.

Berlin’s answer: spend big, spend fast

The centerpiece is a €500 billion infrastructure investment fund. Defense spending is the second pillar, with Germany committing to expenditure that exceeds the previously maintained threshold of 1% of GDP.

The ifo Institute’s Spring 2026 forecast acknowledges the bind. The energy shock is a real drag, but fiscal expansion is expected to provide partial recovery.

What investors should watch

The energy side of the trade is more complicated. TTF gas near €60/MWh creates margin pressure for energy-intensive industries, from chemicals to steel to automotive parts. Companies with the ability to pass costs downstream will hold up better than those caught in the middle.

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