Germany's economy could grow by up to 1.4% this year, a leading economic institute forecast on Thursday, sharply lifting its previous estimate in what may come as a boost for Chancellor Friedrich Merz's government.
The Munich-based ifo Institute raised its estimate for gross domestic product (GDP) growth by 0.6 percentage points from its last analysis in June.
"While a massive energy price shock caused by the Middle East conflict is slowing down the economy, a highly expansionary fiscal policy is supporting growth," said ifo expert Timo Wollmershäuser. "The economy is currently being shaped by conflicting forces."
Other economists have also raised their forecasts in recent days. The German Institute for Economic Research (DIW) more than doubled its June estimate, projecting growth of 1.2%.
Merz's government has committed to turning the German economy around after years of recession and minimal growth.
The ifo forecast said the government's spending spree, which has included heavy investment in defence and infrastructure, is boosting growth.
Increased foreign demand could help German industry raise its economic output by as much as 1.8% this year, despite the challenges of US tariffs and growing Chinese competition, it said.
The German economy - Europe's largest - is developing robustly despite severe "interference," the institute said.
Disruptive factors include the ongoing war in Iran, halting shipping through the vital Hormuz Strait, constricting trade and sending energy prices soaring worldwide; plus low water levels on Germany's rivers, used to transport key goods.
The flip side of the government's loose fiscal policy is a rapid rise in public debt. The deficit could swell from 3% of GDP last year to 4.6% by 2028.
The inflation rate is also set to rise, according to the institute's forecast.
For this year, researchers expect an inflation rate of 2.8%, rising to 3% in 2027 - both well above the European Central Bank's 2% target.