Germany faces higher inflation, slower growth if Middle East war drags on, ZEW says

By Rene Wagner and Maria Martinez

BERLIN, March 20 (Reuters) - Rising energy prices caused by the escalating war in the Middle East could endanger Germany's economic recovery and push inflation higher, according to an analysis by the Leibniz Centre for European Economic Research ZEW seen by Reuters on Friday.

ZEW said the duration of the conflict would be critical. In the scenario deemed most likely by financial market experts surveyed by the institute, the conflict would last up to three months, keeping energy prices elevated and uncertainty high.

Under that scenario, Germany's economic growth would slow noticeably, ZEW said, without giving a number, while inflation would rise to around 2.7%.

"Rising energy prices are slowing growth while also increasing inflationary pressure," said Lora Pavlova, head of ZEW's financial market survey.

A longer and more intense conflict could push Europe's largest economy into stagflation in 2026, a combination of economic stagnation and noticeably rising prices.

A rapid de-escalation, which respondents considered increasingly unlikely, would significantly limit the economic fallout.

"The massive increase in uncertainty is holding back investors and making households more frugal," said ZEW researcher Anna-Lena Herforth.