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 forecasts for inflation as the Iran war causes oil and gas prices to surge.
The five institutes slashed their joint 2026 economic growth forecast to 0.6% from the 1.3% projected in September and lowered their 2027 growth outlook to 0.9% from a prior estimate of 1.4%, as Reuters had reported on Tuesday.
They forecast inflation would
be 2.8% in 2026 and 2.9% in 2027, up from previous projections of 2.0% and 2.3% respectively.
FISCAL POLICY CUSHIONS THE SHOCK
"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.
A spike in oil and gas prices following the start on February 28 of the U.S.-Israeli war on Iran has already helped push German inflation to 2.8% in March.
Germany's lower house of parliament approved initial measures to curb surging fuel prices last Thursday.
The economic institutes argued on Wednesday against government intervention to lower energy prices in the short term, saying it would nullify important market signals, advocating instead for targeted social compensation measures.
Last year, Germany's parliament approved plans for a massive increase in government spending, throwing off decades of fiscal conservatism in the hope of reviving economic growth and scaling up military spending.
But the institutes said in Wednesday's report that industry is hampered by a barely expanding international business, reflecting declining competitiveness, high geopolitical uncertainty and trade policy burdens.
Europe's largest economy has struggled to regain momentum since the COVID-19 pandemic, with rising competition from China and higher energy prices - even before the current spike - challenging its export-driven economic model.
The economic institutes' forecasts feed into government 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.
(Reporting by Maria MartinezEditing by Madeline Chambers and Catherine Evans)
