In spring 2026, the German economy still appears weak and fragile. Macroeconomic conditions are being influenced by various factors, both positive and negative. On the one hand, the heavily expansionary direction of fiscal policy is providing noticeable growth stimulus. On the other, the effects of higher US tariffs are taking their toll on the economy, as are the further decline in the competitiveness of German export industries and an energy price shock triggered by the Iran war. These effects are likely to hinder the economic recovery but not halt it entirely.

Primarily in view of the economic fallout from the Iran war, the economic research institutes contributing to the Joint Economic Forecast have significantly lowered their growth forecast for Germany for 2026. In autumn 2025, they were still forecasting a rise in inflation-adjusted GDP of 1.3 percent, whereas they anticipate growth of just 0.6 percent in their latest spring report. By contrast, the prediction for the rate of inflation has been raised markedly from 2.0 percent to 2.8 percent. For 2027, the research institutes expect inflation-adjusted economic growth of 0.9 percent, with inflation remaining high at 2.9 percent.

The main basis for these forecasts is the assumption – based on market expectations – that energy prices will start to fall again from summer 2026. However, they are likely to stay above their pre-war level until the end of the forecast period. Provided this is the case, the adverse impact on worldwide production should be limited and temporary.

The research institutes anticipate that the elevated rate of inflation will act as a noticeable brake on household consumer spending in Germany. Nevertheless, public-sector consumer spending will increase markedly due to the sharp rise in new debt taken on to fund spending on defense, infrastructure, and climate change mitigation. Companies in the defense and civil engineering sectors should be the main beneficiaries of this. However, the situation will remain subdued for most of the manufacturing sector. Although there are signs that exports have now turned the corner and will pick up slightly over the course of the year, international business is likely to provide only a little impetus at first. In addition to US tariff policy, German exports are also being weighed down by higher energy prices and the accompanying uncertainty. It is therefore probable that capital expenditure by companies in Germany will recover only slowly. Such spending will also be held back by risk-conscious financing conditions that reflect the persistently difficult economic situation. In turn, this will have an impact on investment in housebuilding.

At its meeting on June 11, 2026, the ECB Governing Council decided to raise interest rates by 25 basis points, taking the deposit facility rate to 2.25 percent. The updated macroeconomic projections factor in the increase in energy prices resulting from the Iran war, thereby leading to higher inflation projections. In the baseline scenario, the average inflation rate for 2026 is expected to be 3.0 percent. In light of the Iran war, economic growth of 0.8 percent is forecast for the eurozone, which is lower than had been predicted in March 2026. The ECB Governing Council also emphasized that the current market environment was characterized by heightened uncertainty and reiterated that it would not commit to any specific trajectory for interest rates. Going forward, the council intends to make data-driven decisions from meeting to meeting, based on analyses of the outlook for inflation, the underlying inflation drivers, and the effectiveness of the monetary policy transmission mechanism.

Although the ECB Governing Council has ruled out committing to a predetermined rate path, it emphasized at its meeting in June that the eurozone was well positioned to navigate the prevailing uncertainty. At the same time, the Iran war has had a significant impact on financial markets worldwide. Financing conditions have become stricter, equity markets have dipped at times and are subject to heightened volatility, and market interest rates in the eurozone have surged, especially for short-dated instruments.

Taking the aforementioned effects into consideration, the BVR anticipates that risk costs in the lending business will be at least on a par with 2025 due to economic uncertainties in Europe and the geopolitical risks. Moreover, fiercer competition for deposits may create performance risks for certain institutions. The continuation of weaker economic conditions means that the resilience of many companies is viewed as stagnant or even declining, which, in combination with the higher funding costs, may adversely affect their ability to service their debt. Net interest income in the German banking sector is predicted to rise slightly in 2026 because the ECB’s key interest rates are expected to go up. New lending business is likely to decline year on year. Property prices are forecast to edge up in Germany. The Iran war does not appear to have had a material impact on the real estate market so far, but the increased uncertainty will continue to delay the market’s expected recovery.

The high risks arising from the geopolitical and macroeconomic environment could have a marked influence on the results for 2026. Net interest income is expected to increase noticeably year on year in 2026 owing to the anticipated rise in interest rates and the resulting potential for wider margins. Net fee and commission income is forecast to hold steady, with the bulk of fees and commissions continuing to be generated from payments processing and the brokerage of investment products.

In light of the ongoing period of economic weakness in Germany and global geopolitical risks, expenses for loss allowances for loans and advances will remain at a high level relative to the longer-term average in 2026, primarily owing to the continued large number of loan defaults in corporate banking. However, loss allowances will be down significantly compared with 2025. In 2026, a small net loss is expected under gains and losses on investments due to heightened uncertainty in the capital market environment and the resulting market turmoil. Net income from insurance business will fall substantially in 2026. In addition, administrative expenses will again increase markedly in 2026 as a result of collectively agreed pay rises and higher inflation. Taking account of the factors described above, profit before taxes is expected to be significantly lower in 2026 than in the previous year.

The regulatory capital ratios will likely hold steady in 2026 because the growth of risk-weighted assets will be fully offset by the retention of profits.

The forecast results are subject to considerable uncertainty owing to the effects of the Iran war and the related movements in goods markets and financial markets.