German Institutes Cut 2026 Economic Growth Outlook Over Iran War, Say Sources

Exclusive-German institutes cut 2026, 2027 growth forecasts, raise inflation outlook, sources say

Germany’s Economic Outlook and Inflation Forecasts Amid Middle East Conflict

Growth Forecast Revisions for 2026 and 2027

BERLIN, March 31 (Reuters) - Germany's leading economic institutes cut their economic growth forecasts for this year and next and sharply raised their inflation forecasts in response to the Iran conflict, sources told Reuters on Tuesday.

The institutes slashed their 2026 economic growth forecast to 0.6% from the 1.3% projected in September. German business daily Handelsblatt also reported the 0.6% forecast.

The institutes also lowered their 2027 growth outlook to 0.9% from a prior estimate of 1.4%, according to the sources. 

Impact of Middle East Conflict on German Economy

The reduced projections reflect the economic fallout from the conflict in the Middle East, the sources added. 

Germany's economy has struggled to grow since the COVID-19 pandemic, as rising competition from China and higher energy prices have strained its export-driven economic model, with a renewed surge in energy prices due to the U.S.-Israeli war on Iran posing a further threat to its recovery.

Inflation Outlook and Contributing Factors

Rising Inflation Expectations

INFLATION UP 

The institutes now expect inflation to rise by 2.8% both this year and the coming year, the sources said. Until now, the economists had forecast 2.0% and 2.3% for 2026 and 2027, respectively. 

German inflation accelerated to 2.8% in March due to surging energy prices against the backdrop of the Iran war and economists see further increases ahead.

Government Response and Core Inflation Trends

Germany's lower house of parliament approved on Thursday initial measures to curb surging fuel prices in Europe's biggest economy.

Core inflation, which excludes volatile food and energy prices, was unchanged from the previous month at 2.5%.

However, the longer the war continues and causes energy and other raw materials to become more expensive or scarce, the more likely it is that underlying inflation will also pick up.

Significance of the Updated Forecasts

Implications for Government Planning

The updated forecasts, set to be officially presented in Berlin on Wednesday, are a key input for the government's economic planning, including tax revenue projections. 

The report is a joint effort by five prominent economic institutes: RWI in Essen, the Ifo institute in Munich, IfW in Kiel, IWH in Halle and DIW in Berlin.

Next Steps and Ongoing Monitoring

Final adjustments to the figures remain possible before publication. The government's revised outlook, informed by these forecasts, is being closely monitored as Berlin grapples with economic challenges for the year ahead.

(Reporting by Rene Wagner, Christian Kraemer, Holger Hansen and Klaus LauerWriting by Kirsti Knolle and Maria MartinezEditing by Miranda Murray and Thomas Derpinghauss)