Germany's DIW economic institute revised down its growth forecasts for the next two years on Thursday, expecting only a slow recovery from recession for Europe's largest economy after Berlin cut industry aid in its revised 2024 budget.

Following a forecast 0.3% contraction in 2023, the German economy is expected to grow by 0.6% in 2024 and 1.0% in 2025, the DIW said.

Three months ago, it had forecast growth of 1.2% in both 2024 and 2025.

Germany's recovery is to be aided by falling inflation as well as strong wage increases and a resulting boost to purchasing power, the institute said in a statement.

However, it said budget cuts to the country's climate and transformation fund, which is intended to assist companies with the costly transition to greener production, would dampen growth, by 0.3 percentage points in 2024 and 0.2 percentage points in 2025.

Last month, the German constitutional court ruled that 60 billion euros ($65.37 billion) in unused pandemic debt could not be moved to the climate and transformation fund.

Following weeks of wrangling, Chancellor Olaf Scholz's three-way coalition agreed on Wednesday to reduce the fund by 12 billion euros in 2024 and by 45 billion euros in budget planning up to 2027.

"The agreement on the 2024 budget is a lazy compromise and a huge missed opportunity to make Germany fit for the future again," DIW President Marcel Fratzscher said. ($1 = 0.9179 euros) (Reporting by René Wagner, Writing by Rachel More, Editing by Susan Fenton)