High oil prices due to Israeli strikes on Iran would hurt German economy, DIW says

By Maria Martinez

BERLIN (Reuters) -A conflict between Israel and Iran could dampen the outlook for the German economy if it leads to an increase in oil prices, the economic institute DIW Berlin said on Friday.

Germany is the only G7 nation that has recorded no economic growth for two consecutive years, depressing business and consumer morale.

"If a noticeable increase in oil prices were to result from this, they would be significant dampening factors that come at an unfavourable time," said DIW chief economist Geraldine Dany-Knedlik.

Oil and energy prices are a major factor shaping sentiment, she noted, taking a toll on private consumption.

"Private households are less influenced by the announcements of the European Central Bank and more by the gasoline and diesel prices they perceive daily," said Dany-Knedlik.

There would need to be more permanent effects visible in energy prices for inflation to rise sustainably. But for sentiment and private consumption, it is quite decisive even in the short term, she added.

The German economy is expected to grow by 0.3% this year following two consecutive years of contraction, said DIW Berlin, making it the fifth institute to raise its forecasts for 2025 and 2026.

The DIW had previously expected 0.1% growth for 2025, but it upgraded the forecast due to a better-than-expected first quarter, when the German economy grew by 0.4%.

"The surprisingly dynamic start to the year is likely to spare us from another year of stagnation," said Dany-Knedlik.

The economy is expected to gain momentum at the end of the year thanks to a government investment package, the DIW said in its report.

Germany's parliament approved plans for a massive spending surge in March, including a 500-billion-euro ($577 billion) infrastructure fund and largely removing defence investment from rules that cap borrowing.

The investment package and improved financing conditions are likely to give the economy a noticeable boost, while U.S. trade policy burdens German foreign trade and the global economy, the institute said.

The German economy is expected to grow by 1.7% next year, it said, up from a previous forecast of 1.1%.

($1 = 0.8660 euros)

(Reporting by Maria Martinez; Editing by Rachel More and Joe Bavier)