Germany’s RWI cuts growth outlook as energy shock keeps inflation sticky

Germany’s recovery has lost more of its footing, with the RWI economic institute cutting its growth forecast to 0.8% for both 2026 and 2027 as energy costs linked to the Iran war keep inflation uncomfortably high. The revision marked a sharp downgrade from March, when RWI had expected 0.9% growth in 2026 and 1.2% in 2027, and it underscored how quickly the shock in Europe’s energy markets is feeding into the broader economy.

RWI now expects consumer prices to rise 3.1% in 2026 and 2.9% in 2027, a sign that inflation is proving sticky even as growth remains weak. Chief economist Torsten Schmidt said the current inflation surge is not confined to fuel and energy, warning that higher costs are moving through value chains into more goods and services. That matters for households already losing purchasing power, and for companies facing a squeeze on margins in energy-intensive industries and consumer-facing sectors. RWI said private consumption is likely to remain weak and expects the economy to stagnate in the second quarter of 2026.

The softer outlook places RWI alongside other cautious readings of Germany’s economy. On May 21, the European Commission projected growth of 0.6% in 2026 and 0.9% in 2027, with inflation at 2.9% and 2.7%, after two years of recession and weak growth of just 0.2% in 2025. The Commission said the Middle East conflict had interrupted an upswing seen in late 2025, while higher energy-driven inflation was set to reduce household spending power and weaken consumer sentiment.

Germany’s leading economic institutes sounded a similar note in their Spring 2026 Joint Economic Forecast, projecting GDP growth of 0.6% in 2026 and 0.9% in 2027, with inflation at 2.8% and 2.9%. That report said fiscal expansion for defense, infrastructure and climate protection was helping the domestic economy, but exports remained weak because of competitiveness problems, geopolitical uncertainty and trade-policy burdens. It also warned that Germany’s production potential, now at 0.2%, could come to a standstill by the end of the decade.

RWI did flag some resilience: industrial output, orders and exports rose in the first quarter, and stronger exports plus public investment could help the sector hold up better than expected. But the broader message is clear. Germany is not collapsing, yet its recovery remains too faint to anchor Europe’s industrial engine, and the drag from energy inflation could still spill into transatlantic demand, global supply chains and U.S. exporters tied to German manufacturing.