The war in Iran is weighing heavily on the morale of business leaders, which has dropped to its lowest level since the beginning of the decade. The Ifo business climate index fell by 1.9 points in April to 84.4 points, the Munich-based Ifo institute announced on Friday following its survey of around 9,000 executives. This is the lowest level since May 2020, when the pandemic paralyzed the national economy. Economists were only expecting a slight decline in the Ifo barometer to 85.5 points for this month. Companies are showing a marked pessimism for the months ahead and also consider their current situation less favorable. ‘The Iranian crisis is hitting the German economy hard,’ said Ifo President Clemens Fuest.
Klaus Wohlrabe, head of surveys at the Munich institute, told Reuters that local economy is losing confidence: ‘There is hardly any glimmer of hope this month. Uncertainty is eating away at the German economy.’ This sentiment is also reflected in the business climate by sector; it has significantly deteriorated in the manufacturing industry and services. Gloom also prevails in retail: retailers particularly fear that consumers will become more reserved due to inflation.
The surge in oil and gas prices due to the war in Iran has pushed the inflation rate to 2.7 percent, the highest value since January 2024. Fuel and domestic heating oil, in particular, have seen their prices soar since the start of the conflict. Many economists consider it likely that the inflation rate will exceed three percent in the coming months.
COLLAPSE OF MORALE IN CONSTRUCTION
The rise in oil and gas prices is also driving up the cost of construction materials, adding further pressure to a sector already in crisis. According to Ifo, the business climate in construction collapsed in April. Expectations have dropped significantly. ‘Hopes of recovery have vanished for now,’ noted Ifo chief Fuest. Recently, the sector was fluctuating between shadow and light: construction saw more orders in February but with lower revenue. The war in Iran has significantly darkened the outlook for 2026, which was still promising at the beginning of the year, said Felix Pakleppa, managing director of the German Association of Construction (ZDB): ‘We are maintaining our annual forecast of 2.5 percent real growth for now, but we have to be cautious regarding future geopolitical developments.’
All eyes are on the Persian Gulf, a crucial chokepoint for international oil and liquefied natural gas shipping: ‘The geopolitical evolution around the Strait of Hormuz will determine in the coming weeks whether the German economy will finally emerge from its now chronic stagnation phase this year,’ predicted Robin Winkler, Deutsche Bank’s chief economist for Germany.
Since the war in Iran began in late February, oil prices have soared, with maritime traffic in the Strait of Hormuz effectively paralyzed. Before the military conflict, a fifth of the world’s oil passed through this strait. President Donald Trump recently extended the truce with Iran indefinitely, which has been in effect since April 8, to allow for new discussions. However, uncertainty remains about the actual resumption of peace negotiations between the United States and Iran.
The federal government recently halved its growth forecast for the current year to 0.5 percent. According to Economy Minister Katherina Reiche, while the economy is facing increasing headwinds due to the war in Iran, a recession is not expected. According to Ifo expert Wohlrabe, the economy is likely to stagnate at best in the second quarter. In the worst-case scenario, it could contract by 0.1 or 0.2 percent compared to the previous quarter.
(Reporting by Reinhard Becker and Klaus Lauer, with contributions from Daniela Pegna, written by Elke Ahlswede. For any questions, please contact our editorial team at berlin.newsroom@thomsonreuters.com)
- by Reinhard Becker and Klaus Lauer
