Slow business activity in the spring
Following the pick-up in economic activity in Germany at the beginning of the year, there are signs of an economic slowdown in the second quarter against the background of the ongoing conflict in the Middle East and the related clear rise in energy prices.
In view of the increased geopolitical uncertainties, higher costs for energy and raw materials, and growing supply chain bottlenecks, the latest figures show more and more indications of a weakening of domestic and foreign demand, particularly for capital goods. According to the latest ifo Institute survey, the proportion of industrial companies affected by shortages more than doubled from 7.5% in January to 15.9% in May, and is now at the highest level for two-and-a-half years. Sectors with a high level of demand for oil- and energy-intensive intermediate products, such as the chemical industry and manufacturers of rubber and plastic goods, are feeling the effects of the global reduction in supply.
Following the collapse in the indicators of sentiment following the escalation in the Middle East, these have since stabilised at a low level given the provisional cease-fire and the ongoing peace talks. This presumably reflects the expectation of an incipient rapprochement in the conflict in the Middle East. However, even if this does happen, the price level for energy is likely to remain significantly higher for quite some time before there is a general normalisation of production and trading capacities, and the supply situation for key upstream goods will probably remain tense. Even if the mood in the business community has not recently deteriorated further, and current indicators like the Truck Toll Mileage Index suggest a certain recovery in May, industrial output will likely only see a continuing restrained development in the coming months in view of the persisting problems.
The services sector is also increasingly feeling the geopolitical crisis situation and the energy-price-related losses in purchasing power. According to a recent survey by the German Chamber of Commerce and Industry in May, service providers say their current business situation and their expectations have appreciably worsened. Also, the purchasing managers index for the German services sector is stuck below the growth threshold of 50 points, even if the decline in business activity recently weakened slightly.
On the demand side, households are continuing to exercise restraint in their purchases. Even though real wages in the first quarter rose considerably, by 1.8% over the previous year, both consumer spending and consumer-related services remain weak. For example, price-adjusted retail turnover (excl. cars) fell further in April, as did real turnover in the hotel and restaurant industry in March. However, consumer sentiment recently appears to have stabilised at a low level. The HDE consumer barometer rose slightly in June, and the GfK Consumer Climate Survey saw a moderate recovery, with income expectations brightening somewhat, whilst the propensity to purchase remained at a low level. As long as energy prices remain significantly inflated and geopolitical uncertainty persists, no tangible recovery in consumer spending is to be expected.
Overall, the current cyclical indicators point to a stagnation in the macroeconomic development in the second quarter, with substantial risks of a renewed escalation in the Middle East conflict, a further rise in prices for energy and raw materials, and a worsening of bottlenecks in supplies of materials.
Global economic dynamism slowing
Global industrial output fell appreciably in March, with a seasonally-adjusted month-on-month drop of 1.7%. Whilst output in the industrialised countries generally stagnated, there was a big slump of ‑26.0% in the region of the Middle East and Africa, due to the war in Iran and the closure of the Strait of Hormuz. In year-on-year terms, it was only 1.3% higher. The leading indicators for the world economy are currently suggesting a stabilisation at a low level: the S&P Global Purchasing Managers’ Index (PMI) for the world economy was flat at 51.8 points in May, signalling continuing moderate growth despite the Iran conflict. To some extent, this is probably because clients brought their orders forward in order to mitigate expected price increases and supply issues. Industrial sentiment (52.6 points) was higher than that in the services sector (51.3 points) for the third time in succession in May. In contrast, the economic expectations of financial investors remain rather optimistic: notwithstanding the continuing high level of uncertainty about the next developments in the conflict in the Middle East, the Sentix Economic Index rose by 4.4 to 8.0 points in June. Both situation assessments and business expectations for the world economy improved.
For the first time since August 2025, global trade in goods fell back substantially between February and March, by ‑2.1%. As a result of the de facto closure of the Strait of Hormuz, African and Middle Eastern foreign trade dropped significantly. Further to this, there were sharp falls in China’s exports and those of the Asian emerging economies; some of this was probably related to the Chinese New Year festivities, which came well into this year. Compared with March 2025, the volume of global trade was still up by 2.9%; the month before, the level of expansion had stood at 7.6%.
Ship movements and container handling data point to further falls in the second quarter. The RWI/ISL Container Throughput Index saw another fall, from 142.2 to 141.2 points, due to the ongoing closure of the Strait of Hormuz. The Nordrange Index for the development in the northern eurozone softened by 1.5 points to 118.5 points. There was a particularly large decrease in activity in Chinese ports. According to the RWI, supply chain disruption due to the conflict in the Middle East and falling demand were major factors behind this. The International Monetary Fund’s Trade Monitor also slipped into negative territory in April for the first time for around three years, and indicates declining trade activity.
Current forecasts for the global economic development, based on the assumption of a swift calming down of the conflict in the Middle East, expect GDP growth rates of around 3% for this and next year, but stress the considerable downside risks should energy prices remain elevated for a lengthy period, and should supply chain disruption continue. Tangible impacts on global trade are also forecast, signifying much smaller rises than last year, despite the boom in trade with AI-related goods.
You can read more information about the economic situation in June 26.
