Germany's Ifo institute lowers 2027 outlook, recovery delayed by energy shock
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People walk at the promenade by the river Rhine with the skyline in the background including the Rheinturm in Duesseldorf, Germany, May 13, 2024. Picture taken with long exposure. REUTERS/Jana Rodenbusch
By Maria Martinez and Miranda Murray
BERLIN, June 18 (Reuters) - Germany's Ifo institute on Thursday cut its economic growth forecast for next year to 0.8% from 1.2% expected in March as prices are set to remain higher despite a preliminary agreement to end the conflict in Iran.
However, Ifo stuck with its forecast of 0.8% growth for this year, supported by expansive fiscal policy and higher public spending on infrastructure, climate neutrality and defence.
The recovery that began last year will pause in the second quarter as the government's expansionary fiscal policy is offset by the energy price shock caused by the U.S.-Israeli war on Iran, Ifo chief economist Timo Wollmershaeuser said.
According to the Ifo, the government's additional spending is expected to boost the economy by 0.5 percentage points this year and next, while the energy shock will slow growth by 0.4 points.
"Starting in the third quarter of 2026, the recovery is likely to resume and accelerate toward the end of the year, provided the conflict in the Middle East does indeed ease," he added.
The institute assumes the Middle East conflict will be resolved in the coming weeks and energy prices will gradually fall, but it warned the forecast carries "considerable downside risks" if the conflict flares up again.
Inflation is expected to rise to 2.9% this year and then ease somewhat to 2.7% in 2027, above Ifo's previous forecast, as higher oil prices feed through to goods and services.
Long-term prospects remain weak, Ifo said, with potential growth expected to fall to just 0.1% by the end of the decade due to demographic pressures and weak productivity growth.
A study by the German Economic Institute (IW) showed on Thursday that the number of people employed in the country's industry in 2025 fell to a 10-year low. That should send "a warning signal for future employment trends," said labour market expert Luisa Kunze.
Ifo's forecast is largely in line with the country's four other leading economic institutes, which predicted growth of 0.5% to 0.9% this year and 0.8% to 1.0% next year.
In April, the government halved its 2026 growth forecast to 0.5% and cut its 2027 expectation to 0.9%. Berlin is set to release its next projection in October.
(Reporting by Maria Martinez and Miranda Murray; Editing by Thomas Derpinghaus)
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