German Economy Minister Katherina Reiche (CDU) announced in Berlin that the country's economic growth is expected to reach just 0.5% this year, half the previous forecast. The annual economic report presented in January, before the US-Israeli war against Iran began, is now obsolete.
"The escalation has set us back economically," the minister said. "The situation remains highly volatile." The Economy Ministry has mapped out several scenarios: one where the Gulf conflict continues, keeping the Strait of Hormuz closed, and another where the war ends quickly and trade resumes. However, predicting which outcome is more likely is impossible.
Reiche is certain that inflation will rise sharply to 2.8% this year, driven by higher costs for gasoline, oil, gas, and electricity. Food prices are expected to climb even higher.
"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," Reiche said. She stressed that structural reforms to boost German companies' competitiveness are now more urgent than ever.
Germany's potential growth—the long-term growth rate under normal capacity utilization—stands at only 0.5% of GDP. The Economy Ministry's analysis shows this is far too low to safeguard prosperity in the years ahead.
An increasing number of industrial jobs in Germany are being cut and, in some cases, moved abroad where conditions are more favorable. Reiche warned that Germany is losing ground to competitors in Europe and around the world. According to the European Commission, Germany still ranks at the bottom of Europe's growth tables.
Reiche views further market interventions and state support measures such as fuel-price caps or tax cuts on energy with deep skepticism, in contrast to Finance Minister Lars Klingbeil (SPD). "Tax relief measures do not fall from the sky," she said. Proposed SPD measures, such as a special tax on extraordinary profits in the oil industry, could prompt refinery operations to move out of Germany.
The European Commission shares Reiche's skepticism about an EU-wide excess-profits tax. A similar levy during Russia's war against Ukraine brought €2.5 billion into Germany's coffers, but legal challenges are still pending before the European Court of Justice.
Leading economic research institutes agree with Reiche: Germany's economic growth will be only half of what was assumed before the Iran war. Timo Wollmersheim of the Ifo Institute noted that this year's minimal growth is largely driven by debt-financed government investment.
Researchers point to "long-term risks to the stability of public finances and the substantial consolidation requirements anticipated toward the end of the decade." In practice, interest payments in the federal budget will rise sharply, leaving less money for social services or pensions.
A survey by the German Chamber of Industry and Commerce shows that a large majority of German companies report negative effects from the Middle East war. International firms are also holding back on investment in Germany: energy is too expensive, bureaucracy too extensive, and digitalization still sluggish.
Source: www.dw.com