Berlin's Economic Growth Outlook Dims Amid Iran Conflict and Trade Tensions

The Investitionsbank Berlin (IBB) has lowered its 2026 economic growth forecast for Berlin to 1.5%, marking a 0.3 percentage point drop largely attributed to rising energy prices linked to the Iran conflict. Despite this setback, Berlin's projected growth still edges out the national forecast of 0.6%, potentially marking the city's fourteenth consecutive year surpassing Germany's overall economic advance. The IBB warns that if geopolitical tensions persist, inflationary pressures could intensify, further burdening Berlin's economy.

While the construction sector shows promising signs of recovery with a 41% increase in building permits and a 147% rise in order backlog to €4.58 billion in Q4 2025, the IBB expresses concern over possible European Central Bank interest rate hikes that may stall investment momentum. Meanwhile, the service sector grew by 4.9% last year, driven by telecommunications and information services, though growth slowed to 2.5% in early 2026.

Berlin’s export-dependent industries faced a 1.3% revenue decline to €34 billion, impacted by aggressive U.S. tariff policies despite increased exports to European markets like France and Italy. German companies operating in the U.S. report mixed business sentiment; 43% rate their current situation as good, yet tariff-induced administrative burdens and raised import costs weigh heavily, with 68% passing on costs to consumers. Nevertheless, only a minority plan to reduce U.S. operations.

The city’s labor market remains strained, with unemployment at 10.6%—significantly above the national average of 6.4%. This continued tension reflects broader economic uncertainties fueled by geopolitical developments and trade frictions impacting Berlin’s growth trajectory.