By Holger Hansen
BERLIN, April 16 (Reuters) - The German government has halved its growth forecast for 2026 and has also cut its growth prediction for 2027, while raising its inflation projections, a source told Reuters on Thursday, as the Iran war drives up oil and gas prices.
For this year, the government expects 0.5% growth, down from 1.0% previously expected, and 0.9% growth for next year, down from 1.3%, the source said.
The downward revision follows a cut by Germany's leading economic institutes,
which slashed their joint 2026 growth forecast to 0.6% from 1.3% projected in the previous forecasts and lowered their 2027 forecast to 0.9% from 1.4%.
The institutes' forecasts form the basis for the government forecasts.
Europe's largest economy has been struggling since the pandemic to regain momentum, with increased competition from China as well as higher energy prices - caused first by the Ukraine war and now exacerbated by the Iran conflict - challenging its export-driven economic model.
CONFLICT PUSHES INFLATION HIGHER
The Iran conflict is also driving up inflation expectations.
The 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 German government now expects inflation to accelerate to 2.7% this year and 2.8% in 2027, the same source said, up from 2.3% last year.
As inflation increases, household consumption will slow, growing by an estimated 3.2% in 2026 and 3.3% in 2027, following a 4.2% increase last year, the source said.
With tariffs and global uncertainty taking their toll, foreign trade will not be able to support growth for Germany's export-oriented economy.
Exports are not expected to increase year-on-year again until 2027, when they are forecast to rise by 1.3%, the source said. Imports are expected to grow faster, rising 1.8% in 2027, narrowing Germany's trade surplus.
The new government forecasts will be published on April 2 and the German economy ministry declined to comment.
The International Monetary Fund cut Germany's growth forecasts for this year and next on Tuesday, the largest downgrade among big euro zone economies.
(Reporting by Holger Hansen, writing by Maria Martinez, Editing by Sabine Wollrab, Miranda Murray and Gareth Jones)
