IMF cuts growth forecasts for Germany as Iran war pushes up inflation

The International Monetary Fund cut Germany's growth forecasts for this year and next on Tuesday, in its largest downgrade among big euro zone economies, and raised its inflation projections as the Iran war drives up oil and gas prices.

In its World Economic Outlook, the IMF expects German growth rates of 0.8% in 2026 and 1.2% in 2027, down 0.3 percentage points for both years.

For the euro area, growth of 1.1% in 2026 and 1.2% in 2027 is forecast, 0.2 percentage points less in each year than previously expected.

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 September and lowered their 2027 forecast to 0.9% from 1.4%.

Europe's largest economy has struggled to regain momentum since the COVID pandemic, with rising competition from China and higher energy prices - even before the current spike - challenging its export-driven economic model.

CONFLICT PUSHES INFLATION HIGHER

The Iran conflict - the third major shock to hit the world's economy after the COVID pandemic and Russia's invasion of Ukraine - will dominate this week's gathering of finance officials at the IMF in Washington.

A spike in oil and gas prices following the start of joint U.S.-Israeli strikes on Iran on February 28 pushed German inflation to 2.8% in March.

The IMF forecasts inflation in Germany will rise to 2.7% this year, from 2.3% last year.

Germany's coalition government, which initially resisted calls to provide support, said on Monday it had agreed fuel price relief for consumers and businesses worth 1.6 billion euros ($1.88 billion) via cuts to levies on diesel and petrol.

The IMF said governments should avoid broad fuel price subsidies or tax cuts because they are costly and difficult to roll back. If support is unavoidable, governments should provide temporary, tightly targeted aid to vulnerable households instead, it said.

Germany's increase in public spending, previously praised by the IMF, should help the economy grow.

However, trade policy uncertainty has increased markedly, contributing to weaker investment incentives and tighter financial conditions, which will be only partly offset by Germany's fiscal stimulus, the IMF said in its report.

($1 = 0.8491 euros)

-Reporting by Maria Martinez; Editing by Susan Fenton/Reuters