Ifo Dresden: Iran War Dampens East German Economic Recovery Amid Rising Energy Prices

The ongoing conflict in Iran is casting a shadow over the economic recovery of East German businesses, primarily due to escalating energy prices, according to the Ifo Institute in Dresden. In its summer forecast, the institute predicts that rising energy costs will significantly slow down the region's economic rebound.

For East Germany, economic output is projected to increase by a modest 0.7% in 2026 and 0.8% in 2027. Joachim Ragnitz, deputy head of the Ifo Institute Dresden, described the outlook as "not particularly rosy." He noted that positive effects from tax policies are being counteracted by a challenging external environment, including U.S. tariffs, the Iran war, and ongoing structural changes within the economy.

The construction sector in East Germany is expected to be hit particularly hard this year, with a projected decline in economic output of 0.8%. However, the institute anticipates a recovery in 2027, with a 1.6% increase driven by tax measures. The broader manufacturing sector is forecast to grow by 1.0% in 2026 and 0.6% in 2027, while service providers are expected to see a 0.7% increase in both years.

The labor market shows no signs of improvement, with the number of employed individuals predicted to decrease by 0.4% this year. Population decline further contributes to a tight labor supply. Rising consumer prices are also significantly eroding the purchasing power of private households. Ragnitz emphasized that while a slight upturn is expected, the growth is not as dynamic as desired, placing the responsibility on the federal government to stimulate growth, ensure sufficient tax revenues, and maintain the national standard of living, as state governments have limited influence.