Middle East Conflict Dampens Growth Forecasts in France and Germany Amid Rising Inflation and Energy Concerns

Economic growth forecasts for Germany and France have been significantly impacted by the ongoing Middle East conflict, with energy price shocks and inflation creating challenges for both countries' economies. Germany has been hit particularly hard, with leading economic institutes halving previous growth expectations to only 0.6% for 2026 and 0.9% for 2027. This sharp downgrade is attributed largely to disruptions in energy supplies, including the closure of the Strait of Hormuz and attacks on critical energy infrastructure. Timo Wollmershäuser of the Ifo Institute highlighted the severity of the energy price shock, which has stunted Germany’s industrial recovery by depressing business investments, exports, and value creation, and has contributed to 250,000 job losses in the industrial sector since 2019.

In response, the German government under Chancellor Friedrich Merz is easing fiscal constraints to boost military spending and infrastructure investments, expecting these measures to foster better growth by 2027. Meanwhile, France’s economy is showing more resilience with a predicted growth rate of around 0.9% in 2026, although manufacturing output is also declining amid rising energy prices tied to the conflict.

Inflation in the Eurozone crossed the European Central Bank’s (ECB) 2% target in March due to soaring energy costs linked to the Middle Eastern turmoil. Primoz Dolenc of the ECB’s monetary policy committee warned that the Eurozone might already be in an "unfavorable" economic scenario, where energy supply disruptions could elevate oil prices up to $150 per barrel. Such price shocks risk triggering wage-price spirals and necessitate prompt monetary policy interventions. Market expectations suggest two to three ECB interest rate hikes this year, with some officials proposing increases as soon as April.

Amid this economic turbulence, the French government announced plans to use the unexpected fiscal surplus from high fuel taxes, driven by soaring fuel prices, to finance electrification efforts aimed at reducing dependency on hydrocarbons. Minister Maud Bregeon indicated possible targeted aid for healthcare workers relying on vehicles and highlighted government efforts to maintain fiscal discipline, aiming for a deficit of 5% of GDP this year. However, the government faces criticism over record fuel prices exceeding two euros per liter for diesel and accusations of excessive profits by oil companies during the crisis.

Overall, while France appears somewhat buffered due to its energy mix and policy responses, both France and Germany face heightened risks from prolonged energy supply shocks and inflationary pressures stemming from the Middle East conflict, with significant implications for growth and policy in the coming years.