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

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.

WEAKER GROWTH, ACCELERATING INFLATION

They also now forecast inflation at 2.8% both this year and next, the sources said, up from the previous 2.0% and 2.3%, respectively.

The changes reflect the economic fallout from the Iran war, which has triggered a surge in energy prices, already pushing German inflation to 2.8% in March.

Europe's largest economy has struggled to regain momentum since the COVID-19 pandemic, as rising competition from China and higher energy prices have strained its export-driven economic model. The latest surge in energy prices poses a further threat to its recovery.

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

Core inflation, which excludes volatile food and energy prices, was unchanged in March 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.

Germany's seasonally adjusted jobless rate remained unchanged in March, labour office data showed on Tuesday, but the absolute number of those unemployed remained above the politically important 3 million mark for the third month in a row.

"The economic situation remains tense, not least because of further international uncertainties," Labour Minister Baerbel Bas said.

An Ifo institute survey also released on Tuesday showed 90% of German manufacturing companies expected the Iran war to affect their business.

“The conflict impacts manufacturing directly but above all causes major uncertainty,” said Klaus Wohlrabe, head of surveys at Ifo.

The updated forecasts of the economic institutes, set to be officially presented in Berlin on Wednesday, feed into 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.

Final adjustments to the figures remain possible before publication.