The Munich institute's head of surveys, Klaus Wohlrabe, told Reuters that the domestic economy is losing confidence: 'There are hardly any bright spots this month. Uncertainty is eating its way through the German economy.' This is also reflected in the business climate across individual sectors; sentiment deteriorated significantly in both manufacturing and the service sector. The mood in the retail trade is equally dismal: retailers are particularly concerned that consumers will pull back further due to inflation.
The surge in energy prices resulting from the Iran war has pushed the inflation rate up to 2.7 percent - the highest level since January 2024. Fuel and heating oil, in particular, have seen sharp price increases since the start of the conflict. Economists consider a rise in the inflation rate above the three-percent mark in the coming months to be a distinct possibility.
SENTIMENT COLLAPSE IN THE CONSTRUCTION SECTOR
Rising oil and gas prices are also driving up the cost of building materials - a further burden for the crisis-ridden construction industry. As Ifo further reported, the business climate in the main construction trade collapsed in April. Expectations fell sharply. 'Hopes for an upswing have vanished for the time being', noted Ifo chief Fuest. Recently, the sector has seen a mix of light and shadow: the main construction trade secured more orders in February while simultaneously recording lower turnover. The Iran war has noticeably clouded the outlook for 2026, which had still been encouraging at the turn of the year, said Felix Pakleppa, Managing Director of the Central Association of the German Construction Industry (ZDB): 'We are maintaining our annual forecast of 2.5 percent real growth for now, but must make it subject to further geopolitical developments.'
All eyes are fixed on the Strait of Hormuz in the Persian Gulf, a bottleneck for international maritime transport of oil and liquefied natural gas: 'Geopolitical developments around the Strait of Hormuz will determine in the coming weeks whether the German economy can find its way out of its now chronic phase of stagnation this year', predicted Deutsche Bank's Chief German Economist, Robin Winkler.
Since the start of the Iran war in late February, oil prices have skyrocketed as shipping traffic in the Strait of Hormuz has effectively come to a standstill. Prior to the military conflict, one-fifth of the world's oil was transported through the strait. US President Donald Trump recently extended the ceasefire with Iran, which has been in place since April 8, indefinitely to allow for further talks. At present, however, it remains uncertain if and when peace negotiations between the US and Iran will resume.
The federal government recently halved its growth forecast for the current year to 0.5 percent. According to Economy Minister Katherina Reiche, while the economy is battling increasing headwinds in the wake of the Iran war, a recession is not expected. According to Ifo expert Wohlrabe, the economy is likely to stagnate at best in the current second quarter. In the worst-case scenario, it will contract by 0.1 or 0.2 percent compared to the previous quarter.
(Report by Reinhard Becker and Klaus Lauer, contribution by Daniela Pegna, edited by Elke Ahlswede. For inquiries, please contact our editorial office at berlin.newsroom@thomsonreuters.com)
- by Reinhard Becker and Klaus Lauer
