IfW Kiel holds 2026 German growth forecast at 0.8% despite Iran war, cuts 2027 outlook to 1.0%

The forecast split

The Kiel Institute for the World Economy (IfW) left its 2026 growth forecast for Germany unchanged at 0.8% on Thursday, resisting the trend set by most other economic institutes, the federal government, and the EU Commission, which have all cut their projections to between 0.5% and 0.6% in recent weeks. The IfW's 2026 figure is actually higher than its June 2025 forecast of 0.3%. For 2027, however, the Kiel researchers trimmed their outlook from 1.4% to 1.0%.

The consequences of the Iran war are dampening economic output. The rise in commodity prices is proving more persistent, which will burden economic momentum into the coming year.

Opposing forces

The institute described countervailing forces acting on the German economy. Fiscal policy is providing expansive impulses through public consumption and investment spending, particularly on infrastructure and rearmament. At the same time, the fallout from the Iran war is braking economic dynamism. Exports have stabilised recently, but the IfW sees no signs of the vigorous recovery in exports and business investment that characterised earlier upswings.

Germany's declining competitiveness will lead to further losses in global market share. Measured against earlier upswings, the expected gains are meagre. Without sweeping reforms to strengthen the business location, the German economy is drifting into waters of flagging growth forces with intensifying distributional conflicts.

Quarterly path and inflation

German GDP grew 0.3% in the first quarter. The IfW expects a slight contraction of 0.1% in the second quarter, followed by mild growth in the third and fourth quarters as the positive effect of public investment kicks in during the second half of the year. Inflation is projected to rise from 2.2% in 2025 to 2.8% in 2026, driven by higher commodity prices linked to the Iran war, and to remain elevated at 2.3% in 2027.

Labour market and deficit

The labour market is expected to improve only gradually. The IfW forecasts employment will fall to 45.8 million in 2026 and to just over 45.7 million in 2027, down from nearly 46 million in 2025, partly due to demographic shrinkage of the workforce. The expansive fiscal stance is also set to push the public deficit higher, from 2.8% of GDP to 4.1% by 2027.