German Federal Economy Minister Katherina Reiche (CDU) warned in Berlin that the war in the Persian Gulf will cut Germany’s economic growth to just 0.5% this year. “The escalation has set us back economically. The situation remains highly volatile,” she said, noting that the annual economic report she presented in January — before the US‑Israeli war against Iran began — is now obsolete.
The Economy Ministry has modelled scenarios ranging from continued escalation that keeps the Strait of Hormuz closed to a quick end to the fighting that would restore global trade flows, but Reiche said it is impossible to predict which will occur. She expects inflation to accelerate to 2.8% this year, driven by higher prices for gasoline, oil, gas, electricity and food.
Reiche said the tentative recovery seen after three years of stagnation (2023–25) is being hit by a severe energy‑price shock. “The war in the Middle East has triggered an energy‑price shock beyond our control, and it is weighing heavily on both households and the economy,” she said. She urged faster structural reforms to boost competitiveness, warning that Germany’s potential growth — the long‑term growth the economy can sustainably achieve — stands at only 0.5% of GDP, which she called far too low to safeguard future prosperity.
Industry is already feeling the strain: Reiche warned that industrial jobs are being cut or relocated abroad where conditions are more favourable. “Our growth weakness is above all structural — other countries have done their homework,” she said. The European Commission still ranks Germany near the bottom of EU growth tables.
Reiche expressed deep scepticism about further market interventions or state support such as fuel‑price caps or energy tax cuts, contrasting with proposals from Finance Minister Lars Klingbeil (SPD). “Tax relief measures do not fall from the sky. The money to fund them first has to be earned,” she said. She also opposed a special windfall tax on extraordinary oil industry profits, arguing it could prompt refineries to leave Germany. The European Commission has assessed an EU‑wide excess‑profits tax, but the bloc shares caution; legal challenges to a previous German levy that raised €2.5 billion remain before the European Court of Justice.
Public debt is rising as well. Spring forecasts from Germany’s leading economic research institutes, published before Easter, agree with Reiche that growth will be half of earlier expectations. Timo Wollmersheim of the Ifo Institute noted this year’s modest growth is largely driven by debt‑financed government investment, which increases long‑term risks to public finances and will raise interest payments — crowding out spending on social services and pensions.
Business surveys show widespread impact from the Middle East conflict. A German Chamber of Industry and Commerce (DIHK) poll found a large majority of firms report negative effects and amplified existing problems. A KPMG survey of 400 international companies found many are holding back investment in Germany, citing high energy costs, heavy bureaucracy and sluggish digitalisation.
This article was originally written in German.