By Maria Martinez BERLIN, April 14 (Reuters) - 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,
IMF Lowers Germany Growth Forecasts; Iran Conflict Drives Up Inflation
IMF Economic Outlook and Impact on Germany
By Maria Martinez
BERLIN, April 14 (Reuters) - 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.
Revised Growth Projections
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.
Euro Area Forecasts
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.
Domestic Economic Challenges
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%.
Post-Pandemic Struggles
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.
Oil and Gas Price Surge
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.
Inflation Forecasts
The IMF forecasts inflation in Germany will rise to 2.7% this year, from 2.3% last year.
Government Response and IMF Recommendations
Fuel Price Relief Measures
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.
IMF Policy Guidance
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.
Fiscal Stimulus and Economic Growth
Germany's increase in public spending, previously praised by the IMF, should help the economy grow.
Trade Policy Uncertainty
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)
