Germany Lifts GDP Forecast As Economy Withstands Iran War

Germany on Thursday sharply raised its growth forecast for this year, saying Europe’s biggest economy had withstood the Iran war energy shock and was benefiting from the global AI boom. The government lifted its full-year projection to 1.3 percent, up from its April forecast of just 0.5 percent. The rosier outlook could take some pressure off Chancellor Friedrich Merz, who is facing criticism he has not done enough to kickstart the long-stagnant economy.

“The German economy proved more robust than projected in the spring,” Economy Minister Katherina Reiche said in announcing the new forecasts. “Despite geopolitical uncertainties, despite a global energy price shock, despite the closure of the Strait of Hormuz and despite tariffs, the economy was able to embark on a path of recovery,” she told a press conference. Germany’s economy has faced a long decline due to weak export demand, high energy costs, US tariffs and Chinese competition, though recent indicators suggest it is starting to recover.

This year, Reiche said growth had been supported by strong foreign trade, particularly in the months following the outbreak of the US war against Iran. After the conflict began, foreign importers rushed to stockpile German-made goods such as steel, fertilizer and aluminum, she said. German suppliers were also benefiting from the “global trend of investment in artificial intelligence”, she said. The boom in data centre construction has led to a flood of orders for German-made equipment such as lasers, semiconductor machinery and cooling systems, she said.

The economy ministry also raised its forecast for 2027 to 1.1 percent, from 0.9 percent previously, and said a public spending blitz on defense and infrastructure would support the economy in the coming years. But it warned that household consumption would remain subdued as higher energy costs push up consumer prices. German inflation hit 3.3 percent in September, the highest level in nearly three years. Like elsewhere, Germany has seen fuel costs surge amid the Iran war, prompting the government last week to introduce a subsidy to provide some relief for drivers. The official growth forecast for 2026 is in line with recent estimates by economic think-tanks.

Meanwhile, German exports fell in August for the second month in a row, official data showed Thursday, denting optimism that Europe’s biggest economy would stage a strong rebound. Exports dropped 0.8 percent from the previous month to 137.6 billion euros ($154 billion), after a 0.5 percent fall in July, according to provisional figures from statistics agency Destatis. The disappointing numbers follow a string of positive indicators that had raised hopes the long-stagnant German economy was on track for a recovery, and had largely withstood the Iran war energy shock.

“Today’s export data dents the narrative of German resilience,” ING economist Carsten Brzeski said. “Structural challenges for German exporters remain: geopolitical shifts and trade tensions are clearly affecting an economy that benefited enormously from free trade.” The decline in August was driven by a fall of over six percent in shipments to the United States, the main export destination for German manufacturers. But Destatis also noted that exports to US customers were still around 20 percent higher compared to August last year, when they were more severely impacted by US tariffs. There was also a 0.6 percent fall in exports to other European Union countries. 

There was positive news from China, however, with German exports to the world’s second-biggest economy up nearly five percent.

Exports to China, long a key destination for German goods ranging from cars to factory equipment, have plummeted in recent years as Chinese firms increasingly compete with high-end German manufacturers. Imports rose 0.9 percent month on month in August to reach 118.1 billion euros, and Germany’s trade surplus narrowed to 19.5 billion euros.