Berlin, April 23 - The Institute for Macroeconomics and Economic Research (IMK) reported a sharp rise in the likelihood that Germany will experience an economic contraction in the second quarter, attributing the change largely to the impact of the Iran war on energy prices and supply expectations.
The IMK's monthly business cycle indicator placed the probability of a recession at 33.5% for the second quarter, a significant increase from the 11.6% probability recorded at the start of March. Alongside that rise, the indicator shifted for the first time since October from "yellow-green," which denotes moderate growth, into "yellow-red," a category the institute uses to reflect elevated uncertainty about the economic outlook.
In parallel, Germany's economy ministry revised its outlook on Wednesday, trimming growth projections for 2026 and 2027 while raising its forecasts for inflation. IMK said those official adjustments were consistent with the deterioration the institute captured in its indicator.
IMK analysts identified a cluster of financial market and sentiment signals that have worsened recently and which underpin the weaker outlook. These include rising corporate credit risk premiums, greater volatility in equity markets and interest-rate dynamics that point to investor expectations of further rate tightening by the European Central Bank. Together, IMK said, these developments pushed the monthly indicator into its higher-risk band.
On the real-economy side, German firms reported weaker business climate readings and poorer export expectations. IMK noted that part of this strain reflects global effects from the Iran war, which have hit many emerging markets and in turn dampened demand prospects for German exporters.
IMK researcher Thomas Theobald emphasized the production risk for energy-intensive sectors, saying that U.S. and Israeli attacks on Iran had raised the chance of production declines, particularly for companies that rely heavily on energy inputs.
The IMK report ties together market-based signals and firm-level sentiment to explain the sudden shift in recession risk. The institute's findings highlight a mix of supply-side pressures from increased energy costs and market stress, alongside weakening demand indicators for exporters.