BERLIN, June 18 (Xinhua) -- Germany's economy is expected to grow by 0.8 percent in both 2026 and 2027, as increased government spending offsets much of the economic impact from higher energy prices triggered by the conflict in the Middle East, the Munich-based ifo Institute said on Thursday.
According to the institute's latest forecast, stronger public investment in infrastructure, defense and climate-related projects will support the recovery despite rising inflationary pressures and weaker household purchasing power.
"The economy is currently being shaped by conflicting forces," said Timo Wollmershaeuser, head of forecasts at ifo. While sharply higher energy prices are weighing on economic activity, expansionary fiscal policy is providing a significant boost, he said.
Ifo estimates that higher energy prices linked to the conflict involving Iran will reduce Germany's economic growth by 0.4 percentage points in both 2026 and 2027. At the same time, additional government spending is expected to add 0.5 percentage points to annual growth during the two years.
"The German economy will stagnate temporarily but not fall into a recession," Wollmershaeuser said, adding that growth is expected to resume in the third quarter if tensions in the Middle East ease as anticipated.
The forecast underscores the growing importance of fiscal policy in supporting an economy that has faced weak investment, sluggish productivity growth and demographic challenges. However, stronger growth is expected to come at the cost of higher public borrowing.
Germany's budget deficit is projected to widen from 2.8 percent of gross domestic product (GDP) in 2025 to 4.1 percent in 2026 and 4.9 percent in 2027. Public debt is expected to rise to around 68 percent of GDP by 2027.
The institute estimates that higher imported energy prices will reduce Germany's purchasing power by around 34 billion euros (39.1 billion U.S. dollars) over 2026 and 2027.
The forecast assumes that tensions in the Middle East will ease in the coming weeks and that shipping through the Strait of Hormuz will return to normal. Under this scenario, crude oil prices are expected to start declining in the third quarter and fall below 80 U.S. dollars per barrel by the end of 2027.
Ifo said recent developments following an agreement reached last weekend suggest energy prices could decline more quickly than previously expected, supporting stronger economic growth and lower inflation. However, a renewed escalation of the conflict could keep energy prices elevated and lead to a more pronounced economic slowdown. Enditem
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