Germany Can Weather Iran War If It Doesn’t Last, Institute Says

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(Bloomberg) — Germany’s economy is expected to suffer only a minor setback from the war in Iran if the conflict doesn’t escalate further, according to the German Institute for Economic Research in Berlin.

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Higher oil and gas costs will reduce growth in Europe’s biggest economy by about 0.1 to 0.2 percentage point this year, leaving expansion at around 1%, said the institute, which is known by its acronym DIW. That outlook assumes that the biggest surge in energy prices linked to military intervention has already passed.

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The inflation rate is expected to rise by roughly 0.4 percentage point because of higher energy costs, putting price growth at about 2.4% in 2026 even without a further escalation of the conflict. DIW expects energy costs to ease “significantly” from April to June.

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Oil prices jumped above €100 ($115.95) a barrel after military strikes by the US and Israel on Iran. A corresponding sharp increase in gasoline and diesel costs in Germany prompted Friedrich Merz’s government to set up a task force to monitor the situation. 

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While US President Donald Trump has said the war could end soon — contributing to a recent pullback in crude prices — the lack of visibility on how long it will last is weighing on the global economy.

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“It is important that politicians do their part to reduce uncertainty, which underscores how important it is to implement key reforms without hesitation,” DIW president Marcel Fratzscher said in Berlin on Wednesday. 

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Subsidizing gasoline prices, as demanded by some lobby groups in Germany, would be a “serious mistake” because it would be expensive and result in a “misguided redistribution of wealth from people with low incomes to those with high incomes,” Fratzscher said.

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Germany’s growth should remain supported by expansionary fiscal policy, said DIW, which is one of five key national institutes that monitor the economy.

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Public consumption is set to stay strong, while government investment will increase because of defense and infrastructure spending, according to its forecast. 

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Meanwhile domestic demand is expected to continue benefiting from a resilient labor market, while foreign trade will stay weak amid declining competitiveness and global uncertainty.

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DIW expects Germany to grow 1.4% in 2027, with inflation easing slightly to 2.3%. The global economy is projected to expand about 3.3% this year and next, though protectionist US trade policies and the Iran war may weigh on momentum, particularly from the second quarter of 2026, according to DIW.

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