German institutes cut growth forecast as Iran war drives inflation higher
By Maria Martinez
BERLIN, April 1 (Reuters) - Germany's leading economic institutes cut their growth forecasts for this year and next on Wednesday and sharply raised their projections for inflation as the Iran war drives up oil and gas prices.
The five institutes slashed their joint 2026 growth forecast to 0.6% from 1.3% projected in September and lowered their 2027 forecast to 0.9% from 1.4%, as Reuters reported on Tuesday.
"The conflict in the Middle East is increasing the pressure on German policymakers to consistently tackle structural reforms," German Economy Minister Katherina Reiche said in response to the spring report.
The institutes forecast inflation at 2.8% in 2026 and 2.9% in 2027, up from previous projections of 2% and 2.3%, respectively.
FISCAL POLICY CUSHIONS THE SHOCK
Higher energy prices are expected to reduce Germany's income by about 50 billion euros ($58 billion) over this year and next, as the country will have to spend more on imported energy, the institutes said.
"This shock makes Germany poorer," said Oliver Holtemoeller of the Halle Institute for Economic Research (IWH).
A spike in oil and gas prices following the start on February 28 of joint U.S.-Israeli strikes on Iran has already helped push German inflation to 2.8% in March.
"The energy price shock triggered by the Iran war is hitting the recovery hard, but at the same time expansionary fiscal policy is bolstering the domestic economy and preventing a stronger slide," said Timo Wollmershaeuser, head of forecasts at the Ifo institute.
Losses in purchasing power will weigh on private consumption, the institutes said, forecasting that after household spending rose 1.6% in 2025, it would increase by only 0.4% in 2026 and 2027.
AGAINST INTERVENTIONS TO LOWER PRICES
Germany's lower house of parliament approved initial measures to curb surging fuel prices last Thursday.
Under the legislation, which came into effect on Wednesday, petrol stations may increase prices only once daily, at 1200 local time (1000 GMT).
ADAC, Germany's largest automobile association, said average nationwide fuel prices rose on Wednesday, with Super E10 climbing to 2.147 euros a litre from 2.099 euros and diesel to 2.347 euros from 2.301 euros.
The group said the new rule was not lowering high fuel prices and instead encouraged companies to price in risks such as possible oil price increases in advance.
The economic institutes argued against government intervention to lower energy prices in the short term, saying it would blunt important market signals, advocating instead for targeted social compensation measures, such as adjusting basic income support rates to reflect higher living costs.
BALANCE OF A YEAR IN POWER
German Chancellor Friedrich Merz took office last May promising to revive growth in Europe's largest economy.
"So far, a coherent reform policy, formulated as one piece and clearly showing the criteria by which all policy areas are being reviewed, is not recognisable," Holtemoeller said.
Europe's largest economy has struggled to regain momentum since the COVID pandemic, with rising competition from China and higher energy prices - even before the current spike - challenging its export-driven economic model.
Foreign trade will remain a drag on growth, with exports not expected to rise year-on-year again until 2027, when they are forecast to increase by 1.3%.
Imports are expected to grow faster, rising 2.1% in 2027, narrowing the trade surplus.
The institutes expect Germany’s potential growth - currently at 0.2% - to come to a complete standstill by the end of the decade.
"You do not have to stimulate growth. Market economies grow on their own if you let them and if people want that," Holtemoeller said. "The goal is to remove the brakes on growth in order to unlock potential reserves."
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