According to the latest monthly report published by the German Central Bank (Bundesbank), Germany’s economic output increased significantly during the first quarter of 2026, indicating greater resilience than previously expected despite ongoing economic pressures. Industrial production, industrial sales, and goods exports recorded strong performance during the period.
The Bundesbank stated that industrial activity benefited from stronger domestic and international demand, while exports were particularly supported by shipments to non-eurozone markets, especially the United States.
Labor market conditions continue to weaken
Despite the stronger-than-expected economic performance, the Bundesbank warned that Germany’s labor market continued to deteriorate. According to the report, the weakening labor market reflects not only softer employment conditions but also ongoing demographic challenges affecting the country’s workforce structure.
The central bank also noted that business sentiment in parts of the services sector worsened significantly following the outbreak of the war in Iran.
Higher energy prices push inflation upward
Inflation remained elevated during the first quarter, mainly due to rising energy prices linked to geopolitical tensions in the Middle East. The Bundesbank stated that prices for fuels and heating oil increased sharply in March after crude oil prices rose following the outbreak of the Iran conflict.
Although services inflation eased somewhat, it remained above historical averages. Germany’s annual inflation rate increased further to 2.9 percent in April and is expected to remain elevated in the coming months. According to the report, future inflation developments will remain heavily dependent on how the Middle East conflict evolves.
German economy expected to stagnate in Q2
The Bundesbank stated that Germany’s economy is expected to stagnate during the second quarter of 2026 due to the economic impact of the Middle East conflict.
Higher inflation and declining purchasing power are weighing on private consumption and consumer-related service sectors. At the same time, elevated energy prices and supply bottlenecks are negatively affecting industrial activity and the construction sector.
Frontloading effects may prove temporary
The report also noted that some industrial sectors temporarily benefited from frontloading effects as companies accelerated orders in anticipation of future supply shortages. However, the Bundesbank cautioned that these supportive effects are likely to be temporary.
According to the central bank, the negative consequences of the conflict are expected to increasingly burden German industry in the coming months through higher costs, weaker demand, and continued supply chain disruptions.
