Surging Energy Prices Threaten Germany’s Economic Recovery
Research
20.03.2026
ZEW Analysis: Inflation and Growth Depend on Duration of Middle East Conflict
The escalating war in the Middle East since early March 2026 is significantly increasing the economic risks for Germany. A recent analysis based on the ZEW Financial Market Survey shows that a surge in energy prices and growing uncertainty, in particular, could weigh on economic development. While the impact will be limited if the war ends soon, a prolonged war threatens to cause noticeable losses in economic growth and a significant increase in inflation.
“Rising energy prices are hampering growth whilst at the same time exacerbating inflationary pressures. Should disruptions to energy supplies persist for a prolonged period of time, price stability in Germany will be at risk”, says Dr. Lora Pavlova, researcher at ZEW’s “Pensions and Sustainable Financial Markets” Research Unit and in charge of the ZEW Financial Market Survey. “The sharp increase in uncertainty is holding investors back and causing households to cut back on their expenses”, adds Anna-Lena Herforth, researcher at the “Pensions and Sustainable Financial Markets” Unit.
Three scenarios with different outcomes
The analysis examines three possible scenarios for how the conflict could evolve. According to the financial market experts surveyed, the most likely outcome is a prolonged conflict lasting up to three months. In this scenario, energy prices would remain elevated for longer and economic uncertainty would continue to be high. This would lead to a noticeable slowdown in growth in Germany and inflation would likely rise to around 2.7 per cent. An even longer and more intense conflict could even push the economy into a phase of stagnation in 2026, driving inflation well above the target. In contrast, a rapid de-escalation – increasingly considered unlikely – would significantly limit its economic impact.
Energy prices are the main burden
The financial market experts identify the sharp rise in energy prices as the main cause of the current economic pressures. The price increases are driving up companies’ production costs and eroding the purchasing power of private households. In addition, supply chains are disrupted and the willingness to invest is declining because of high uncertainty. In terms of economic policy, the respondents expect, above all, fiscal measures to stabilise energy supplies and provide relief for businesses and households. At the same time, monetary policy faces a trade-off between combating inflation and stabilising the economy.
