Germany’s business outlook soured as higher energy prices due to the Iran war threaten to derail its nascent economic revival.
An expectations index by the Ifo institute dropped to 86 from a revised 90.2 – the lowest in more than a year. That was in line with the expectations of analysts in a Bloomberg survey. A gauge measuring current conditions unexpectedly held steady.
“The war in Iran has put any hope of a recovery on ice for the time being,” Ifo President Clemens Fuest said Wednesday in a statement. “Uncertainty among companies has increased noticeably.”
Germany’s most closely watched sentiment gauge is signalling that Europe’s largest economy – which only just managed to snap two years of contraction in 2025 – is headed for another rough patch.
While a splurge on infrastructure and defence was meant to perk up output and encourage spending, events in the Middle East are making that outcome less likely by the day.
The chemicals industry, for one, has warned of shockwaves from the conflict as supply squeezes and costlier energy prompt firms to restrain output. Consumption is also set to suffer as inflation broadens from petrol stations to everyday products.
Bundesbank President Joachim Nagel has called on Germany’s government to do everything in its power “to seize the opportunities for economic growth that are within our control,” urging reforms and forward-looking investments.
But higher interest rates could be coming in response to the Iran war. Nagel has indicated that a hike could arrive as soon as April’s policy meeting, with President Christine Lagarde saying Wednesday that the ECB won’t be “paralysed by hesitation.”
“The deterioration in business expectations across all major sectors following the start of the Iran war casts doubt on the anticipated economic rebound this year. The government’s spending spree was set to lift growth in the coming quarters. Now, if the surge in energy prices persists, it could offset much of that support — keeping Germany’s economy on a sluggish path,” Bloomberg Economics’ Martin Ademmer said.
Economists surveyed by Bloomberg predict Germany’s economy will expand of just 1% this year – an outlook that’s probably now subject to severe downside risks.
“We could be sliding into a dramatic situation that threatens this economic upswing we’ve just begun to see,” Vice Chancellor Lars Klingbeil said on Sunday.
Investors have already sounded the alarm. Confidence worsened far more than expected in March amid doubts that the economy can emerge unscathed.