Energy Price Shock Slows German Economy - Global Growth Remains Moderate

Geraldine Dany-Knedlik, Guido Baldi, Nina Maria Brehl, Angelina Hackmann, Konstantin A. Kholodilin, Laura Pagenhardt, Jan-Christopher Scherer, Teresa Schildmann, Hannah Magdalena Seidl, Ruben Staffa, Kristin Trautmann and Jana Wittich

DIW Weekly Report, 2026, vol. 16, issue 24, 187-200

Abstract: The German economy is failing to gain momentum after three weak years. At the turn of the year, a modest recovery appeared to be taking hold, driven primarily by domestic demand and private consumption. However, in addition to the structural problems already present, the German economy must now also contend with the consequences of the Iran War. The energy price shock has halted the recovery before it could gain traction. Rising oil and gas prices have since been driving up consumer prices, eroding household purchasing power, and fueling the already widespread uncertainty. Nevertheless, a deep downturn comparable to the energy price crisis of 2022/23 does not appear to be on the horizon. At the start of the year, Germany's economic output still grew by 0.3 percent, supported by the public sector and foreign trade, while the rest of the domestic economy remained weak. As the year progresses, the impact of the energy price shock is becoming clearly apparent: economic output is likely to contract slightly in the second quarter (by 0.2 percent) and decline marginally again in the third quarter, before stabilizing toward year-end. Private consumption is softening, and investment appetite remains subdued. Once again, the public sector remains the sole source of support. Even beyond the current year, the expansionary fiscal policy stance remains the decisive driver. Rising defense spending and the gradual deployment of funds from the special fund for infrastructure and climate neutrality will account for the bulk of growth—though they are no miracle cure, as the impact of these investments is unfolding only gradually. After growth of 0.5 percent this year, DIW Berlin expects the economy to expand by 0.8 percent next year—both around half a percentage point lower than forecast in the spring outlook. Consumer price inflation, at 2.9 and 3.0 percent respectively, exceeds the European Central Bank's stability target, and the unemployment rate is rising to 6.4 percent this year. An updated scenario analysis by DIW Berlin highlights the scale of these risks. In a downside scenario derived from market expectations, growth this year would be around 1.5 percentage points lower—equivalent to the German economy contracting by just under half a percent in 2026. Inflation would reach a level similar to that seen during the energy price crisis of 2023. The global economy continues to grow at a moderate pace despite the energy price shock. While the Iran War is weighing on the global outlook, world trade expanded strongly at the start of the year and is only slowing modestly. The United States is bucking this trend, growing by 2.2 percent this year, driven by investment and energy exports; the euro area, by contrast, is growing only weakly at 0.3 percent. For global economic output overall, DIW Berlin projects growth of 3.1 percent this year and 3.3 percent next year.

Keywords: Business cycle forecast; economic outlook (search for similar items in EconPapers)
JEL-codes: E32 E66 F01 (search for similar items in EconPapers)
Date: 2026
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