Germany’s economic output will shrink this year, amid weak demand from abroad, soaring interest rates, and a protracted energy crisis, the latest forecast from the German Economic Institute (IW) revealed.

The economy is in a state of a “shock,” according to the IW, with businesses particularly affected by geopolitical uncertainties arising from the conflict in Ukraine. German companies and industries will “feel the global problems all the harder” this year due to scarcity and surging prices of raw materials and energy, the economists warned.

Sluggish global trade and weak demand will result in lower-than-expected gross domestic product for the EU’s largest economy. It’s predicted to slump by almost 0.5% compared to last year, while unemployment will reach 5.5%, the report said.

Inflation has remained high since the start of the year and is likely to stay at around 6.5%, weighing on consumer spending.

READ MORE: Germany facing zero growth – Bundesbank

“The government urgently needs to take action to end this economic downturn,” the head of the macroeconomic and the Business Cycle Research Unit at the IW, Professor Michael Gromling, said.

“Lower tax burdens and attractive and un-bureaucratic support for innovation and investment would help companies cope better with the current shocks,” he added.

Economic sentiment in Germany has suffered from the effects of fiscal tightening, such as increased production costs and high interest rates. Investments have become less attractive for companies, with the construction sector among the worst-hit, data showed. Investments in home building are expected to fall by 3% this year.

For more stories on economy & finance visit RT’s business section