German institutes lift growth forecasts, business morale rises

By Maria Martinez

BERLIN, Sept 24 (Reuters) - Germany's leading economic institutes raised their growth forecasts for this year and next, while business morale rose more than expected in September, suggesting Europe's largest economy is proving resilient to the energy-price shock from the Iran war.

Any pickup would be welcomed by Chancellor Friedrich Merz after Germany's sluggish economy proved a sore point in this month's regional elections that resulted in big gains for the far right and far left.

The German economy is forecast to grow 1.3% in 2026 and 1.1% in 2027, the institutes said on Thursday, up from earlier forecasts of 0.6% and 0.9%, respectively. The numbers confirm a Reuters report from Tuesday.

The Ifo institute, meanwhile, said its business climate index rose to 89.9 in September from 88.8 in August, topping the 89.0 forecast in a Reuters poll of analysts.

Flash PMI data on Wednesday also showed German business activity expanding at its fastest pace in almost a year.

A MODEST RECOVERY

While the German economy has been recovering since the end of 2025, the rebound, although stronger than expected in the spring, remains modest, the institutes said.

"The recovery rests on a narrow foundation, as high energy prices and struc­tural problems continue to weigh on economic activity,” said Oliver Holtemoeller, economist at the Halle Institute for Economic Research (IWH).

"In the long term — and even in the medium term — we will see much lower economic growth rates, above all for demographic reasons," he added. 

The institutes expect growth of just 0.4% in 2028.

They also forecast an increase in inflation to 2.8% in 2026 and 3.2% in 2027, before a fall to 2.0% in 2028. 

The forecasts are made jointly by IWH, RWI in Essen, Munich's Ifo institute, IfW in Kiel and Berlin's DIW.

REFORMS

Holtemoeller warned that research shows economic performance tends to be weaker where populist forces are in government.

"Being open to the world is important for innovation and for attracting highly skilled workers, and a characteristic of both left- and right-wing populist parties is that they target precisely this openness and undermine it," Holtemoeller said.

Following the disastrous election results for the governing coalition in eastern Germany and Berlin, Merz's conservatives have pledged to continue with planned reforms, while his partners in the centre-left Social Democrats (SPD) want to make changes.

"In economic policy, there is a principle known as the consistency of economic policy. It means choosing a certain course and then sticking to it, so that all economic actors can adjust to it," said Stefan Kooths, economist at the Kiel Institute for the World Economy.

(Reporting by Maria MartinezEditing by Ludwig Burger and Susan Fenton, Kirsten Donovan)