According to the latest forecasts from the German Institute for Economic Research (DIW) and the Kiel Institute for the World Economy (IfW), the German economy is facing a recession due to the impact of high energy prices triggered by the Iran war. Business investment remains sluggish, with growth being propped up solely by government spending. In the face of this downturn, economists are suggesting a solution of looking to neighboring countries.
DIW’s latest economic outlook released recently indicates that the sharp rise in energy prices caused by the Iran war will lead to economic contraction in Germany in the spring and summer quarters of this year, resulting in two consecutive quarters of negative GDP growth, termed a “technical recession.”
Geraldine Dany-Knedlik, Director of Economic Trends at DIW, stated that “the impact of the energy price shock is clearly dragging down economic recovery, but the situation is not a repeat of 2022/23. This time, the impact is smaller, energy supply is still secure, and Germany’s dependency on fossil fuel imports is lower than after the outbreak of the Ukraine conflict.”
DIW projects that by the end of this year, the German economy will gradually stabilize with the support of the federal government’s fiscal program. The institution has significantly revised down its growth expectations: 0.5% for the full year of 2026 (from the original forecast of 1.0%) and 0.8% for 2027 (from the original forecast of 1.4%).
Dany-Knedlik emphasized, “This year, economic growth can be maintained positively solely thanks to public sector spending.” Increased defense spending and funding from the Infrastructure and Climate Neutrality Special Fund (SVIK) will bring about slight growth momentum, but private consumption recovery is slow, and export-oriented industries are facing weak recovery due to structural weaknesses and external uncertainties.
The forecast released by the Kiel Institute for the World Economy on June 11 also confirms this trend: Germany is “increasingly caught in an investment crisis.” Despite companies being expected to drive digitalization and climate-neutral transformation, equipment investment (machinery, equipment, and vehicles, etc.) remains consistently weak.
The Kiel Institute projects that Germany’s equipment investment will decline by 1.2% in 2026. Although it is expected to rebound by 4.4% in 2027, it is mostly driven by the public sector, particularly defense spending, with no significant improvement in private sector investment, even lower than the expectations three months ago.
Therefore, the institution has revised down its growth forecast: Germany’s GDP growth rate is expected to remain at 0.8% in 2026 (supported by strong performance at the beginning of the year) and lowered to 1.0% in 2027 from the previous prediction of 1.4%. Equipment investment in the second quarter is projected to decline by 1.2%, with only construction investment growing by 2.6% due to delayed projects from adverse weather conditions in the first quarter.
The analysis from the Kiel Institute highlights that the rise in energy prices due to the Iran war, weak demand, declining profit margins, increased uncertainty, and structural barriers facing industries (such as insufficient orders) collectively suppress business investment willingness. While the Special Fund can provide some support, its additional stimulus effects are limited due to tight local finances, mainly being used for planned projects.
DIW predicts that Germany’s inflation rate will remain high: 2.9% in 2026 and 3.0% in 2027, significantly above the European Central Bank’s target of 2%. The unemployment rate is expected to rise to 6.4%, slightly dropping to 6.2% in 2027. The increase in public spending will raise the fiscal deficit: 3.9% in 2026 and 4.3% in 2027.
Marcel Fratzscher, the President of DIW, urged the government to quickly implement targeted relief measures for low-income groups, such as introducing a one-time “energy cost subsidy” similar to 2022. He criticized the extension of the fuel price discount (Tankrabatt) as expensive and lacking targeting, suggesting not extending it beyond June 30.
Both institutions point out that the slow recovery of private consumption and business investment is a major concern, emphasizing that the funds from the Special Fund must be truly “additional” and quickly disbursed to achieve the desired effects.
Economist Jan Schnellenbach points out that the solution to Germany’s economic recession is right around us. Germany needs to learn from the experiences of countries like Denmark, Austria, and others. “Germany is facing risks of falling behind in many areas,” Schnellenbach said. Meanwhile, many neighboring countries have already extensively tested successful reforms that “can also benefit Germany.”
For example, while Germany has been debating the construction of power lines, railway projects, and highways for decades, Denmark has established a procedure that significantly speeds up planning and approval processes. In Denmark, fundamental political decisions are made early on. Once the decision to build a railway, bridge, or power line is made, a time-critical and responsibility-clear process is initiated. Local authorities, associations, and citizens affected are involved from the beginning.
In contrast, in Germany, fundamental debates often delay practical approval processes, taking years. This leads to multiple reviews, appeals, and extended delays lasting for years. This difference is particularly evident in the expansion of offshore wind energy. Denmark can build large wind farms within a few years, while Germany’s planning and approval processes often take longer than the actual construction time. This is a crucial factor for investors. Capital seeks predictability, something Denmark can provide.
Furthermore, in Austria, the state-owned infrastructure company ASFINAG has been financing highways and expressways for decades in a non-traditional budget logic. The company charges tolls, borrows from the capital market, and uses these funds for infrastructure construction, operation, and maintenance. In Germany, every major transportation project goes through periodic political budget negotiations, while the Austrian infrastructure financing company enjoys long-term planning security. Bridge renovations are not due to abundant funding but because they genuinely require renovation. Investments follow technical needs rather than political budget cycles. Germany faces toll crises, while Austria shows the world how to reliably finance infrastructure construction.
In terms of digitalization, German citizens still need to print forms, sign them, and then scan them. Meanwhile, the Estonian government has a high level of digitalization, allowing almost all official procedures to be completed online.
This fundamental principle changes the entire management process: the state can only request data once. Individuals already registered with an address do not need to notify other agencies again. Any entrepreneur can complete registration digitally within a few hours. Tax filing takes only a few minutes due to all relevant data being ready. The key distinction is that German authorities are digitizing existing processes, whereas Estonia has reconstructed the process from scratch.
Regarding the shortage of technical workers, Sweden serves as an example. For years, Sweden’s labor force participation rate has been significantly higher than Germany’s. Particularly noteworthy is the longer stay of women and older workers in the labor market. This is not coincidental. Childcare services are widespread in Sweden. Continuing education is seen as an ongoing commitment rather than an exception during the crisis period. Those looking to reorient their careers will find Sweden’s system convenient. While Germany explores ways to attract more technical workers, Sweden has already demonstrated how to better utilize existing talent.
The research clearly points out that it is not urging Germany to copy foreign models. The core message is that Germany does not need to theoretically solve many problems, as other countries have found practical solutions that can also benefit Germany.