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Ifo Cuts 2027 Economic Growth Forecast for Germany as High Energy Prices Persist

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The ifo Institute lowered its economic growth forecast for Germany in 2027, as energy prices are expected to remain elevated despite the US-Iran peace agreement aimed at ending the war in the Middle East.

In its summer economic forecast published Thursday, the research institute said it now expects Germany's price-adjusted gross domestic product to expand by 0.8% in 2027, amid a projected gradual fall in energy prices, assuming a de-escalation of the war over the coming weeks and reopening of the Strait of Hormuz. However, the research institute flagged that energy prices could remain above pre-war levels and negatively impact growth by 0.4 percentage points for both 2026 and 2027.

Ifo's previous GDP growth projection for 2027 stood at 1.2%, under a de-escalation scenario. For 2026, the growth estimate remains at 0.8%.

"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," the ifo said. "Since the agreement reached last weekend, futures market prices have pointed to energy prices falling faster. In this case, the inflation rate is also likely to decline faster, and growth should be higher. However, it is also possible that the agreement reached over the weekend will not hold, and the conflict will escalate again."

Meanwhile, headline inflation is projected to reach 2.9% in 2026 before easing to 2.7% 2027, under the assumption of a de-escalation. The prior expectations were 2.2% and 2.3%, respectively.

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