High oil prices due to Israeli strikes on Iran would hurt German economy, DIW says

DIW Berlin warns that a conflict between Israel and Iran leading to higher oil prices could negatively impact the German economy, potentially offsetting recent upward revisions to growth forecasts. Chief economist Geraldine Dany-Knedlik noted that rising oil and energy prices would particularly hurt consumer sentiment and private consumption, overshadowing the impact of ECB announcements. While the DIW raised its 2025 growth forecast to 1.7% from 1.1% due to a strong first quarter and expects further momentum from a government investment package, geopolitical risks pose a significant threat.

Analysis

The German economic outlook presents a nuanced scenario, with the DIW Berlin institute highlighting a significant downside risk from potential oil price increases stemming from an Israel-Iran conflict. This concern is particularly acute as Germany is the only G7 nation to have recorded no economic growth for two consecutive years, which has depressed business and consumer morale. DIW's chief economist, Geraldine Dany-Knedlik, emphasized that rising oil and energy prices directly impact private consumption and consumer sentiment, potentially overshadowing European Central Bank policy announcements, and could act as "significant dampening factors" even in the short term. Despite these geopolitical risks, DIW has upgraded its 2025 growth forecast for Germany to 1.7%, up from a previous 1.1%, citing a surprisingly dynamic first quarter where the economy grew by 0.4%. This improved outlook, which also projects 0.3% growth for the current year thereby avoiding further stagnation, is further supported by an anticipated boost from a substantial 500-billion-euro government investment package targeting infrastructure. However, the institute also noted that U.S. trade policy continues to burden German foreign trade and the global economy, representing an ongoing headwind.

Key Decisions for Investors

• Investors should closely monitor geopolitical developments between Israel and Iran, as any resultant surge in oil prices could significantly undermine Germany's nascent economic recovery and consumer sentiment.
• While the upgraded 2025 growth forecast of 1.7% and the substantial fiscal stimulus provide a more positive outlook for German assets, portfolios should account for the economy's heightened vulnerability to energy price shocks and its direct impact on private consumption.
• Consider the persistent negative influence of U.S. trade policy on Germany's export-driven economy, which may temper the benefits from domestic fiscal measures and the improved growth projections.