German economic recovery to slow only slightly due to Iran war, economists say

* Ifo, IfW see 0.8% economic growth this year

* Government spending expected to fuel demand

* Major institutes expect inflation of at least 2.5% this year (Adds RWI, IfW forecasts)

By Miranda Murray

BERLIN, March 12 (Reuters) - Germany's economic recovery will slow only slightly this year as long as energy prices driven up by the Iran war ease in the coming months, said three institutes on Thursday.

The Ifo institute expects economic growth of 0.8% this year, on the assumption that oil and gas prices will remain high only in the short term, in line with its forecast in December. It sees German economic growth accelerating to 1.2% next year.

Europe's biggest economy expanded in 2025 for the first time in three years, growing by 0.2%, as consumer sentiment improved, helped by a government spending surge.

RECOVERY DESPITE SHOCK

"Despite the energy price shock, the recovery in Germany is likely to continue throughout this year," Ifo's head of forecasts, Timo Wollmershaeuser, said.

He pointed to increased government spending on infrastructure, carbon neutrality and defence as stimulating demand.

Without the U.S.-Israeli war with Iran, Ifo said it would have raised the 2026 forecast to 1.0%.

However, if oil and gas prices remain high for longer, Germany's economy will grow by only 0.6% in 2026 as inflation would be expected to peak at just under 3%, the institute said.

The effect would carry over into 2027, with growth of just 0.8%.

SHORT-TERM RISE IN COMMODITY PRICES

The IfW institute lowered its 2026 forecast made in December by 0.2 percentage points, to 0.8%, on the assumption that commodity prices will remain elevated for only a few months.

The economy will slowly regain its footing over the course of the year, said IfW, which raised its growth forecast for next year to 1.4% from 1.3% previously.

The RWI institute revised down its forecast for this year by 0.1 points to 0.9% and slashed its 2027 outlook by 0.2 points to 1.2%.

"The Iran war demonstrates how vulnerable the German economy remains due to its energy dependencies," said RWI forecasting head Torsten Schmidt.

All three institutes see inflation rising to at least 2.5% this year before easing again in 2027. (Reporting by Miranda Murray; Editing by Thomas Seythal and Susan Fenton)