San Francisco Frontiers - Mideast war to brake German recovery: institute

Energy costs have jumped since the conflict erupted on February 28, a massive burden for Europe's top economy as it seeks to get back on its feet after a long decline.

The recovery, while likely to continue, "will be dampened by the sharp rise in crude oil and natural gas prices", said the Ifo Institute.

If the war escalates, output in Germany will be reduced by 0.4 percentage points in 2026 and by the same amount again in 2027, compared to a scenario without conflict, it forecast.

GDP growth would come in at just 0.6 percent this year and 0.8 percent next, it said.

Even if there is a quick end to the war, output will still be lower, although the impact would be less severe, Ifo said.

The hit to the economy will be a blow to Chancellor Friedrich Merz, who had hoped to spur a strong turnaround this year with vast outlays on defence and infrastructure.

Germany is heavily reliant on imports for its energy, including for the crucial manufacturing sector, leaving it vulnerable to international price fluctuations.

Still, Ifo indicated the energy shock would likely be less severe than the one triggered by Russia's 2022 invasion of Ukraine, when Moscow cut crucial supplies of gas to Germany.

"Immediate supply shortages" were not expected as Germany only obtains a small proportion of its energy supplies from the Middle East, it said.

Germany was among countries that announced Wednesday it would tap into strategic oil reserves in a bid to bring down prices, part of the biggest ever release by International Energy Agency members.

H.Davis--SFF