Leading German economic institutes on Wednesday slashed their growth forecast for 2026 by more than half to reflect the expected fallout from soaring energy prices caused by the Iran war.

Gross domestic product (GDP) is expected to grow by only 0.6% this year, down from a September forecast of 1.3%, according to figures revealed by five leading think tanks.

The announcement puts another damper on hopes in Berlin for sustained recovery, after the German economy narrowly avoided a third consecutive year of recession in 2025.

The conservative-led administration of Chancellor Friedrich Merz has taken on billions in debt for investments in infrastructure, defence and climate action in a bid to boost growth.

First significant effects of those measures had been expected to make themselves felt this year, but the US-Israeli war on Iran is set to significantly hamper growth in Germany, according to the experts.

"The energy price shock triggered by the Iran war is hitting the recovery hard, but at the same time expansionary fiscal policy is bolstering the domestic economy and preventing a stronger slide," Timo Wollmershäuser, senior economist at the Munich-based ifo institute said.