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. She said the recent escalation has set the economy back and made the annual economic report she presented in January, before the US‑Israeli conflict with Iran began, effectively obsolete.
The Economy Ministry has modelled scenarios ranging from prolonged escalation that keeps the Strait of Hormuz closed to a rapid end to the fighting that would restore trade flows, but Reiche said it is impossible to know which path will occur. The ministry expects inflation to rise to about 2.8% this year, driven by higher prices for gasoline, oil, gas, electricity and food.
Reiche said the tentative recovery after three years of stagnation from 2023 to 2025 is being undermined by a severe energy‑price shock. She urged faster structural reforms to boost competitiveness, warning that Germany’s potential growth — the sustainable long‑term growth rate — is only around 0.5% of GDP, far too low to protect future prosperity.
Industry is already feeling the effects: Reiche warned of job cuts and relocations abroad to countries with more favourable conditions. She described Germany’s growth weakness as largely structural and said other countries have already implemented reforms. The European Commission continues to rank Germany near the bottom of EU growth comparisons.
Reiche expressed scepticism about further market interventions or broad state support such as fuel‑price caps or energy tax cuts, contrasting with proposals from Finance Minister Lars Klingbeil (SPD). She argued tax relief has to be funded and opposed a special windfall tax on extraordinary oil company profits, saying it could prompt refineries to leave Germany. The European Commission has considered an EU‑wide excess‑profits tax, but the bloc is cautious; legal challenges to a prior German levy that raised €2.5 billion are still before the European Court of Justice.
Public debt is rising. Spring forecasts from Germany’s main economic research institutes, published before Easter, align with Reiche in halving earlier growth expectations. Timo Wollmersheim of the Ifo Institute noted that this year’s modest expansion is largely driven by debt‑financed government investment, increasing long‑term fiscal risks and raising future interest payments, which could crowd out social spending 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 reporting negative effects and that the war has amplified existing problems. A KPMG survey of 400 international companies found many are postponing investment in Germany, citing high energy costs, heavy bureaucracy and slow digitalisation.
This piece was originally written in German.