German institute raises 2026 growth forecast after Iran ceasefire

A leading economic institute on Thursday lifted its forecast for German growth in 2026 on Thursday, with the ceasefire in the Middle East and high levels of government spending boosting gross domestic product (GDP). 

In its quarterly forecast, the Munich-based ifo Institute predicted GDP would rise 0.8% this year, up 0.2 percentage points from the last report in March, which was based on an "escalation scenario" in the conflict between Iran and the United States.

The two sides have sealed a framework agreement ahead of 60 days of further negotiations on remaining points of contention, raising hopes that the economic fallout from the war could be limited.

However, the after-effects of the surge in energy prices linked to the blockade of the Strait of Hormuz will be felt for a long time in Germany, the institute warned, with inflation expected to hit 2.9% this year and remain at 2.7% in 2027. 

German growth is expected to plateau at 0.8% next year, ifo said, with both Germany and the eurozone continuing to lag far behind the global economy's 2.2% growth.

A brighter spot is Germany's looser fiscal policy, with heavy investment in infrastructure, climate neutrality and defence driving growth.

"While a massive energy price shock caused by the Middle East conflict is slowing down the economy, a highly expansionary fiscal policy is supporting growth. The economy is currently being shaped by conflicting forces," wrote ifo economic researcher Timo Wollmershäuser.