The International Monetary Fund has cut its growth projections for Germany for 2026 and 2027 and raised its inflation forecast, citing higher energy prices tied to the conflict involving Iran. In its World Economic Outlook, the IMF now expects German growth of 0.8% in 2026 and 1.2% in 2027, reductions of 0.3 percentage points for each year compared with its previous estimates.
For the broader euro area the IMF pared back expectations as well, forecasting growth of 1.1% in 2026 and 1.2% in 2027 - each 0.2 percentage points lower than earlier projections. The revisions represent the largest downgrade among major euro zone economies in the fund's latest report.
The downward adjustment for Germany follows a similar reassessment by the country's leading economic institutes. Those institutes cut their joint forecast for 2026 to 0.6% from a September projection of 1.3%, and trimmed their 2027 outlook to 0.9% from 1.4%.
Europe's largest economy has faced persistent headwinds since the COVID pandemic. Rising competition from China and elevated energy costs had already strained Germany's export-driven model, and the IMF highlighted a further rise in inflation linked to recent geopolitical developments.
According to the IMF report, the Iran conflict - described as the third major shock to the world economy after the COVID pandemic and Russia's invasion of Ukraine - has pushed energy prices higher. A spike in oil and gas prices following the start of joint U.S.-Israeli strikes on Iran on February 28 contributed to a rise in German consumer prices, with inflation reaching 2.8% in March.
The IMF now projects inflation in Germany will increase to 2.7% this year, up from 2.3% last year. In response to rising pump prices, Germany's coalition government agreed to a targeted package of fuel price relief valued at 1.6 billion euros, delivered through cuts to levies on diesel and petrol. The IMF cautioned, however, that broad fuel subsidies or across-the-board tax cuts can be costly and hard to withdraw, and recommended that any unavoidable support be temporary and tightly targeted at vulnerable households.
The fund also noted that Germany's recent rise in public spending - previously commended by the IMF - should support economic growth. At the same time, the report warned that growing trade policy uncertainty has dampened investment incentives and contributed to tighter financial conditions. Those negative forces, the IMF said, will only be partially offset by the country's fiscal stimulus measures.
The report includes a currency conversion reference of $1 = 0.8491 euros.
Taken together, the IMF's updated outlook signals a more subdued near-term trajectory for Germany and the euro area, driven by the compounded effects of elevated energy costs and shifts in global trade dynamics. Policymakers, the fund suggests, should weigh the trade-offs between supporting households and firms while avoiding measures that could prove fiscally costly or difficult to reverse.