PUBLISHED May 28, 2026
A Promising Start Turns Sour
According to the German Federal Ministry for Economic Affairs and Energy’s (BMWE) April 2026 report, Germany’s economic development lost noticeable momentum in the first quarter against the backdrop of the Middle East conflict. While sentiment indicators among businesses and, to some extent, consumers initially showed a slight brightening at the start of the year, these have clouded over significantly since the onset of the Iran war. Manufacturing order intake recovered somewhat in February after January’s slump, but this was driven mainly by increased foreign demand, while domestic orders declined again, largely due to a further drop in orders for investment goods tied to large defence contracts.
Industry Weakens as 90% of Firms Report Iran War Impact
Leading indicators for industrial production, including the truck toll mileage index from the Federal Statistical Office and automotive industry production data, point to an overall weak development of industrial activity in March. The effects of the Iran war — including resulting increases in energy and raw material prices and supply bottlenecks for intermediate products — likely played a significant role. According to ifo Institute surveys, around 90 percent of industrial companies report being negatively affected by the Iran war in their business operations, with more than a third affected by delivery delays for intermediate products or raw materials.
Construction Hit by Harsh Winter Weather
Construction also showed clear weakness, though for a different reason. Gross value added in construction likely declined in the first quarter due to unfavourable weather conditions at the start of the year, which led to restrictions in both building construction and civil engineering. In the first two months of the year, construction output was around 2 percent below the level of the fourth quarter of 2025 — with the finishing trades hit particularly hard, registering a 1.8 percent decline, while building and civil engineering stabilised somewhat after weather-related slumps the previous month.
The mood in consumer-facing service sectors has deteriorated markedly in the face of sharp energy price increases and heightened geopolitical uncertainty. The S&P Services Index fell in March to its lowest level since September of the previous year, and retail expectations in the ifo business climate survey also declined. According to GfK’s forecast, consumer sentiment is expected to deteriorate further in April, falling by 3.2 points to -28.0 — following a 0.6 point drop in March to -24.8. The decline was driven above all by a sharp deterioration in income expectations, reflecting fears of rising consumer prices and significantly weaker economic expectations.
The mood in consumer-facing service sectors has deteriorated markedly in the face of sharp energy price increases and heightened geopolitical uncertainty. The S&P Services Index fell in March to its lowest level since September of the previous year, and retail expectations in the ifo business climate survey also declined. According to GfK’s forecast, consumer sentiment is expected to deteriorate further in April, falling by 3.2 points to -28.0 — following a 0.6 point drop in March to -24.8. The decline was driven above all by a sharp deterioration in income expectations, reflecting fears of rising consumer prices and significantly weaker economic expectations.
In the wake of the Iran war and the associated rise in energy prices, inflation climbed sharply in March to 2.7 percent year-on-year, with consumer prices rising 1.1 percent compared to February alone. The decisive factor was the strong increase in energy prices, which rose by 7.2 percent — the first significant increase since December 2023 — while food price inflation remained moderate at 0.9 percent. Crude oil prices repeatedly exceeded the $100 per barrel mark during the month, well above previous levels.
Employment continued its decline at the start of the year, with the number of employed persons falling by a seasonally adjusted 12,000 in February, while employment subject to social insurance contributions fell by 30,000 in January. Meanwhile, the IWH insolvency trend recorded 1,716 corporate insolvencies in March, an increase of 17 percent over the previous month and 18 percent higher than March 2025 — a rise driven primarily by smaller businesses rather than major corporate failures.
Germany’s further economic development depends largely on developments in the Iran war. The announced ceasefire is an important precondition for normalising trade and production capacity in the Middle East, but given the destruction of production capacity there and the backlog caused by supply bottlenecks, this is expected to take considerable time. Energy and raw material prices are likely to remain elevated in the meantime, meaning the burden on the German economy will likely remain noticeable throughout the rest of the year — with a gradual normalisation representing the best-case scenario.
In the wake of the Iran war and the associated rise in energy prices, inflation climbed sharply in March to 2.7 percent year-on-year, with consumer prices rising 1.1 percent compared to February alone. The decisive factor was the strong increase in energy prices, which rose by 7.2 percent — the first significant increase since December 2023 — while food price inflation remained moderate at 0.9 percent. Crude oil prices repeatedly exceeded the $100 per barrel mark during the month, well above previous levels.
Employment continued its decline at the start of the year, with the number of employed persons falling by a seasonally adjusted 12,000 in February, while employment subject to social insurance contributions fell by 30,000 in January. Meanwhile, the IWH insolvency trend recorded 1,716 corporate insolvencies in March, an increase of 17 percent over the previous month and 18 percent higher than March 2025 — a rise driven primarily by smaller businesses rather than major corporate failures.
Germany’s further economic development depends largely on developments in the Iran war. The announced ceasefire is an important precondition for normalising trade and production capacity in the Middle East, but given the destruction of production capacity there and the backlog caused by supply bottlenecks, this is expected to take considerable time. Energy and raw material prices are likely to remain elevated in the meantime, meaning the burden on the German economy will likely remain noticeable throughout the rest of the year — with a gradual normalisation representing the best-case scenario.
