The DIW (German Institute for Economic Research) has adjusted its economic forecasts, anticipating that the conflict in the Middle East will moderately slow down the German economy and increase inflation.
The ongoing conflict in the Middle East is expected to have a notable impact on the German economy, as per the latest assessment from the DIW. The institute forecasts that inflation will rise by 0.4 percentage points this year and economic growth will decline by 0.1 to 0.2 percentage points. Despite these challenges, the overall recovery of the economy is not expected to cease, supported by strong public consumption and an uptick in state investments, particularly in defense and infrastructure.
Key to maintaining economic stability will be the effective deployment of public funds, especially considering the German government's establishment of a 500 billion Euro special fund aimed at modernizing infrastructure. Additionally, significant exemptions from the country's debt brake for military rearmament are intended to bolster public spending. This strategic investment aims to address both immediate and long-term economic challenges posed by external conflicts.
Looking ahead, the DIW anticipates a modest growth of 1.0 percent for the fiscal year 2026 and a slight increase to 1.4 percent in 2027, despite the current geopolitical uncertainties. These projections highlight the delicate balance the German economy must strike between maintaining recovery momentum and mitigating the adverse effects of global tensions.
