German institutes raise growth forecasts as business morale improves

Germany's leading economic research institutes have raised their growth projections for this year and next, while a closely watched survey showed business sentiment improving more than expected in September — signs that Europe's largest economy is holding up against the energy-price shock linked to the Iran war.

The institutes now expect the German economy to expand 1.3% in 2026 and 1.1% in 2027, up from earlier forecasts of 0.6% and 0.9%. The joint outlook is produced by the Halle Institute for Economic Research (IWH), RWI in Essen, the Ifo institute in Munich, IfW in Kiel and Berlin's DIW.

Separately, Ifo said its business climate index climbed to 89.9 in September from 88.8 in August, exceeding the 89.0 reading analysts had expected. The improvement followed flash PMI data showing German business activity expanding at its fastest pace in nearly a year.

A modest recovery

While the economy has been recovering since the end of 2025, the institutes described the rebound as modest and built on a narrow base. Oliver Holtemoeller, an economist at IWH, said high energy prices and structural problems continue to weigh on activity.

"In the long term — and even in the medium term — we will see much lower economic growth rates, above all for demographic reasons," he said. The institutes expect growth of just 0.4% in 2028.

They also forecast inflation rising to 2.8% in 2026 and 3.2% in 2027, before easing to 2.0% in 2028.

Reforms and political pressure

The upgraded forecasts come as Chancellor Friedrich Merz's government faces scrutiny over the economy after regional elections in eastern Germany and Berlin delivered large gains for parties on the far right and far left.

Holtemoeller warned that research points to weaker economic performance where populist forces hold government. He said openness to the world is important for innovation and for attracting skilled workers, and that both left- and right-wing populist parties tend to target that openness and undermine it.

Merz's conservatives have pledged to press ahead with planned reforms, while their centre-left Social Democrats coalition partners want changes. Stefan Kooths, an economist at the Kiel Institute for the World Economy, stressed the importance of policy consistency so that economic actors can adjust to a stable course.