PUBLISHED May 28, 2026
A Promising Start That Didn’t Last
According to “Die wirtschaftliche Lage in Deutschland im April 2026”, the Federal Ministry for Economic Affairs and Energy’s April 2026 economic report, the year opened with cautious optimism. Business sentiment indicators had shown tentative signs of improvement at the turn of 2026, and consumer expectations were nudging upward. That brief window of hope has since closed.
With the escalation of the Iran War in early 2026, confidence across both the corporate and household sectors deteriorated sharply. The conflict has delivered a double blow: spiking energy costs and renewed supply chain disruptions that are rippling through German industry and retail alike. According to the Ministry’s April assessment, the country’s economic momentum slowed significantly in the first quarter — and the indicators for the second quarter look even more challenging.
Industry in Retreat
Germany’s industrial sector — the backbone of its export-driven economy — is showing clear signs of strain. Manufacturing output stagnated in February following a contraction in January, leaving production roughly one percentage point below the level recorded in the final quarter of 2025.
Incoming orders did recover somewhat in February after a sharp January drop, but the bounce was almost entirely driven by foreign demand. Domestic orders fell again, weighed down by a decline in investment goods — particularly in defense-related procurement, a sector that had been unusually active in the second half of last year.
The picture is further clouded by the forward-looking indicators. The truck toll activity index published by Germany’s Federal Statistical Office and automotive production data from the VDA both point to weak industrial performance in March. According to ifo Institute surveys, roughly 90 percent of industrial companies report being directly affected by the Iran War, with more than a third experiencing delays in the supply of key inputs and raw materials.
Construction and Services Offer No Relief
Away from the factory floor, the broader domestic economy is faring little better. Construction output fell in the first two months of the year — partly due to an unusually cold winter — leaving the sector around two percent below its fourth-quarter 2025 levels. Both residential and civil engineering reported weather-related disruptions.
Consumer-facing services are also losing ground. The S&P services index dropped to its lowest level since September 2025, while the ifo business climate gauge for the retail sector continued its slide. Real retail sales (excluding automobiles) fell by half a percentage point in February compared to January. Hospitality revenues, meanwhile, were down roughly four percent in January alone compared to the previous month.
The trajectory points toward a difficult second quarter for consumption-driven industries, as rising prices erode purchasing power and geopolitical anxiety dampens household spending.
After months of relative calm, inflation made an unwelcome return in March. Consumer prices rose by 2.7 percent year-on-year — up sharply from February — with monthly prices jumping by 1.1 percent in a single month.
The culprit is unmistakable: energy. Energy prices rose by 7.2 percent year-on-year in March — their steepest increase since December 2023 — as oil markets responded to the conflict in the Middle East. Crude oil repeatedly crossed the $100-per-barrel threshold during the month, well above the three-month average of $76. Gas prices also climbed, while electricity remained elevated.
Core inflation, which strips out food and energy, held steady at 2.5 percent, suggesting that the broader price environment has not yet unraveled. Food inflation remained comparatively modest at 0.9 percent. But with energy costs filtering through into transport, production, and household bills, the pressure on real incomes is set to intensify.
After months of relative calm, inflation made an unwelcome return in March. Consumer prices rose by 2.7 percent year-on-year — up sharply from February — with monthly prices jumping by 1.1 percent in a single month.
The culprit is unmistakable: energy. Energy prices rose by 7.2 percent year-on-year in March — their steepest increase since December 2023 — as oil markets responded to the conflict in the Middle East. Crude oil repeatedly crossed the $100-per-barrel threshold during the month, well above the three-month average of $76. Gas prices also climbed, while electricity remained elevated.
Core inflation, which strips out food and energy, held steady at 2.5 percent, suggesting that the broader price environment has not yet unraveled. Food inflation remained comparatively modest at 0.9 percent. But with energy costs filtering through into transport, production, and household bills, the pressure on real incomes is set to intensify.
One of the few genuinely bright spots in the April report is the trade data — though even here, the outlook is clouded. Nominal goods and services exports rose by 2.2 percent month-on-month in February, recovering from a January setback. Trade with EU partners rebounded strongly, up 5.8 percent. Over the January–February period as a whole, exports were up 2.7 percent compared to the previous quarter.
However, exports to the United States fell by 7.5 percent in February, and shipments to China dropped by 2.5 percent — a reminder of the structural headwinds Germany faces beyond the current crisis.
Forward indicators have since deteriorated. The ifo export expectations index swung from positive to negative in March, as energy-intensive industries in particular braced for weakening demand on key markets. The automotive sector stands out as a rare exception, still projecting growth in foreign revenues. For most others, however, the outlook has darkened.
Germany’s labor market continues to lose ground — quietly but persistently. Employment fell again in February, with the number of people in work declining by 12,000 on a seasonally adjusted basis. Payroll employment covered by social insurance also dropped by 30,000 in January.
The unemployment rate held flat in March, but this stability masks underlying fragility: a reduction in long-term unemployment benefit claimants was offset by an equivalent rise among those receiving short-term support. The use of short-time working arrangements — Germany’s celebrated tool for avoiding layoffs during downturns — is also tapering off slowly.
Both the IAB and ifo employment barometers have stabilized at low levels, suggesting the worst may not deepen dramatically in the near term. But corporate restructuring processes show no signs of abating, and the Ministry cautions that a genuine labor market recovery in the first half of 2026 is not on the horizon.
The insolvency data adds another layer of concern. According to the IWH insolvency trend, corporate bankruptcies rose 17 percent in March compared to February, and were 18 percent above March 2025 levels — a significant acceleration. The increase is concentrated among smaller firms, suggesting a long tail of businesses that have been running on borrowed time since the pandemic.
Germany’s economic trajectory in the coming months will be shaped primarily by the course of the Iran War. A ceasefire has been announced — a necessary precondition, the Ministry notes, for any normalization of trade and energy flows in the region. But the damage to production infrastructure there, combined with persistent supply backlogs, means that energy and commodity prices are likely to remain elevated for some time.
The global economy remains more resilient than might be expected: world trade grew strongly at the start of the year, and global industrial output is still expanding. But the S&P Global purchasing managers’ composite index for the world economy fell sharply in March to 51.0 points, and investor sentiment tracked by the Sentix index has turned negative.
For Germany, the central scenario is one of continued pressure through mid-year, with a gradual easing of commodity prices if geopolitical conditions stabilize. Public services in health, education, and administration are expected to provide some cushioning. The large-scale defense and public investment orders placed in late 2025 will also begin materializing as actual output — but that process will take time.
Europe’s economic powerhouse is not in freefall. But it is navigating some of the most difficult crosscurrents it has faced in years — and the fog, for now, shows no sign of lifting.
One of the few genuinely bright spots in the April report is the trade data — though even here, the outlook is clouded. Nominal goods and services exports rose by 2.2 percent month-on-month in February, recovering from a January setback. Trade with EU partners rebounded strongly, up 5.8 percent. Over the January–February period as a whole, exports were up 2.7 percent compared to the previous quarter.
However, exports to the United States fell by 7.5 percent in February, and shipments to China dropped by 2.5 percent — a reminder of the structural headwinds Germany faces beyond the current crisis.
Forward indicators have since deteriorated. The ifo export expectations index swung from positive to negative in March, as energy-intensive industries in particular braced for weakening demand on key markets. The automotive sector stands out as a rare exception, still projecting growth in foreign revenues. For most others, however, the outlook has darkened.
Germany’s labor market continues to lose ground — quietly but persistently. Employment fell again in February, with the number of people in work declining by 12,000 on a seasonally adjusted basis. Payroll employment covered by social insurance also dropped by 30,000 in January.
The unemployment rate held flat in March, but this stability masks underlying fragility: a reduction in long-term unemployment benefit claimants was offset by an equivalent rise among those receiving short-term support. The use of short-time working arrangements — Germany’s celebrated tool for avoiding layoffs during downturns — is also tapering off slowly.
Both the IAB and ifo employment barometers have stabilized at low levels, suggesting the worst may not deepen dramatically in the near term. But corporate restructuring processes show no signs of abating, and the Ministry cautions that a genuine labor market recovery in the first half of 2026 is not on the horizon.
The insolvency data adds another layer of concern. According to the IWH insolvency trend, corporate bankruptcies rose 17 percent in March compared to February, and were 18 percent above March 2025 levels — a significant acceleration. The increase is concentrated among smaller firms, suggesting a long tail of businesses that have been running on borrowed time since the pandemic.
Germany’s economic trajectory in the coming months will be shaped primarily by the course of the Iran War. A ceasefire has been announced — a necessary precondition, the Ministry notes, for any normalization of trade and energy flows in the region. But the damage to production infrastructure there, combined with persistent supply backlogs, means that energy and commodity prices are likely to remain elevated for some time.
The global economy remains more resilient than might be expected: world trade grew strongly at the start of the year, and global industrial output is still expanding. But the S&P Global purchasing managers’ composite index for the world economy fell sharply in March to 51.0 points, and investor sentiment tracked by the Sentix index has turned negative.
For Germany, the central scenario is one of continued pressure through mid-year, with a gradual easing of commodity prices if geopolitical conditions stabilize. Public services in health, education, and administration are expected to provide some cushioning. The large-scale defense and public investment orders placed in late 2025 will also begin materializing as actual output — but that process will take time.
Europe’s economic powerhouse is not in freefall. But it is navigating some of the most difficult crosscurrents it has faced in years — and the fog, for now, shows no sign of lifting.
