Leading economic institutes more than halved their growth forecast for Germany on Wednesday, warning that the energy shock caused by the Middle East war would hit Europe's top economy hard.
A group of leading institutes slashed their joint GDP growth forecast for 2026 to 0.6 percent, down from a September prediction of 1.3 percent.
Inflation is now forecast to rise to 2.8 percent, up from 2.0 percent, "weighing on household purchasing power".
"The energy price shock triggered by the Iran war is hitting the recovery hard," said economist Timo Wollmershaeuser of the Ifo institute, adding that increased government spending was nevertheless "preventing a stronger slide", AFP reported.
Oil and natural gas prices have surged since the end of February, when the United States and Israel attacked Iran, killed its supreme leader and plunged the Middle East into war.
Iran has since closed the Strait of Hormuz to ships of countries it considers allied with the US and Israel, effectively blocking a sea lane that normally transports about a fifth of the world's oil and liquefied natural gas.
Higher inflation in Germany would hit consumer spending, the institutes said, weighing on an already weak economy that has barely grown since a burst of pent-up demand after the Covid pandemic in 2022.
The government on Wednesday introduced rules allowing petrol stations to only raise prices once a day, at noon.
But motorist Sebastian, a 49-year-old estate agent who did not want to give his surname, told AFP at a Frankfurt petrol station that this was not enough to protect his spending power.
"Whether the price of petrol changes once a day or 10 times a day doesn't really matter," he said, adding it was "certainly not enough" to lower his costs.
Germany's economy, struggling with fierce Chinese competition in sectors from cars to chemicals, was in the doldrums even before US President Donald Trump last year imposed sweeping new tariffs before starting the Mideast war in late February.
Chancellor Friedrich Merz, who took office last May, vowed to borrow and spend hundreds of billions through a special infrastructure fund over coming years in what was dubbed a spending "bazooka" aimed at getting the economy back on its feet.
But the economists said that much of the money was simply paying for day-to-day spending.
"Government expenditure on consumption is rising much more sharply than investment," economist Oliver Holtemoeller of the Halle Institute for Economic Research said. "That was not the idea behind changing the financing rules."
The outlook for the longer term was also dire.
Citing low productivity, industrial decline and an ageing population, the institutes warned that Germany's economy would soon be unable to grow sustainably.
"We have also reassessed the structural changes in the German economy and, in particular, revised our forecast for industrial growth downwards," Wollmershaeuser said.
In an era when "demographic change is hitting with full force", he said, "potential growth will come to a standstill by the end of the decade, and we will have to get used to average GDP growth rates of zero percent".
Speaking to broadcaster Welt TV, Economy Minister Katherina Reiche said the government was working on reducing labour taxes and energy costs but that Germans would have to get used to working more over the course of their lives.
"We need to make this country vigorous again," she said. "Germany needs to get its will to win back."
