By Maria Martinez and Klaus Lauer
BERLIN, Sept 2 (Reuters) - The German Institute for Economic Research, DIW Berlin, sharply raised its growth forecasts for Europe's largest economy on Wednesday, citing stronger-than-expected exports and a milder energy price shock from the Iran war.
DIW now expects Germany's economy to grow 1.2% in 2026, more than double its previous forecast of 0.5%, followed by expansions of 1.0% in 2027 and 0.7% in 2028.
"The German economy is recovering somewhat better this year
than expected, but it is still standing on rather shaky ground," said Geraldine Dany-Knedlik, head of economic forecasting at DIW.
Despite higher prices due to the Iran conflict and the uncertainty from U.S. tariffs, the German economy has shown resilience and grew by 0.3% in the second quarter.
The institute warned that the recovery remained fragile, with high gas prices, weak household demand and structural problems in industry likely to curb momentum in the second half of the year.
Economic output is expected to stagnate in the third quarter as low water levels on key waterways and elevated energy costs weigh on energy-intensive sectors including chemicals and metals.
Public consumption and investment will account for around 70% of this year's growth, DIW said, supported by infrastructure, climate and defence spending.
"The German economy could be at a turning point towards stronger growth over the next two years," said DIW President Marcel Fratzscher. "At present, however, economic momentum is mainly due to the public sector."
An investment surge has been made possible by a special €500 billion infrastructure fund and an exemption from debt rules for defence spending approved last year.
ECONOMISTS TO EXAMINE IMPACT OF HYBRID ATTACKS
DIW Berlin said that in future forecasts, it would begin assessing the economic effects of hybrid attacks, including those targeting German infrastructure.
Future assessments will consider potential disruptions to activity, supply-chain distortions and the cost of stepping up security, Dany-Knedlik said.
"This is certainly an important aspect for forecasts in the coming years, assuming the situation does not change," she said.
The move comes as concerns grow over attacks on critical infrastructure, prompting authorities to consider how to better protect against what officials describe as a growing threat from cyber and hybrid attacks.
The power grid in the eastern German state of Brandenburg was the target of sabotage on Tuesday after unexploded incendiary devices damaged power lines, the state's interior minister said, without ruling out the possibility that foreign powers were behind the attack.
The German government said on Tuesday that it had concluded that Russia was responsible for an attempted drone attack at Leipzig/Halle Airport last month, fitting into a broader pattern of Russian hybrid operations in Europe.
(Reporting by Maria Martinez and Klaus Lauer; editing by Matthias Williams)
