By Maria Martinez
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 of the German economy gained momentum over the past
winter half-year," Ifo said in its latest forecast.
"However, the sharp rise in energy prices triggered by the conflict in the Middle East is reducing households' purchasing power and weighing on private consumption."
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.
(Reporting by Maria Martinez, Editing by Miranda Murray)
