The Economic Situation in the Federal Republic of Germany in May 2026¹

According to the Federal Statistical Office's Rapid Estimate, the German economy expanded somewhat more strongly than expected in the first quarter of 2026, with real quarterly GDP growth of +0.3%. The growth was driven by public and private-sector consumption, and by exports. However, current indicators suggest a clear slowdown in Q2: rising prices, supply chain problems and uncertainty are affecting business and consumer sentiment. The coming months are expected to see further high levels of volatility on the energy, raw materials and financial markets. The future economic development depends on how long the conflict in the Middle East lasts and trade routes and production capacities are impacted. But even once the situation has improved, the repercussions on prices for energy and raw materials and on supply chains are likely to be felt for quite some time. Industrial activity remains weak. Whilst new orders – which continue to be dominated by fluctuating levels of large orders – continued to point upwards in March, a role was probably played by orders being brought forward due to the outbreak of the Iran war. Industrial production has declined for the fourth time in succession. The first quarter saw falls both in new orders and in industrial output. The latest indicators of sentiment are not suggestive of an improvement in the second quarter. Price-adjusted retail sales (seasonally adjusted, excluding motor vehicles) fell by 0.8% in March compared with the preceding month, following an upward correction. Year-on-year, the retail sector experienced negative growth of 0.7% in March. New passenger car registrations by private individuals were flat in April compared to March; the three-month comparison saw a slight decline of 0.3%. Recent sentiment indicators have seen a further significant deterioration, suggesting that the development in consumption will worsen appreciably in Q2 of 2026. Inflation rose to 2.9% in April, even higher than in March. The rise in prices is primarily due to the reduction in supply caused by the Middle East conflict and the resulting energy price inflation of 10.1%. The coming months are likely to see inflation being driven by the rise in energy prices, with relief coming from the temporary cut in the energy tax on fuel. The labour market remains weak. The seasonally adjusted number of people in work fell further in March. Employment requiring compulsory social insurance payments declined in February. At the same time, unemployment rose slightly in April. Due to the weak demand for labour and high uncertainty, no improvement on the labour market is expected to take place in the second quarter. The number of cases filed for corporate insolvency fell by 5.8% between December 2025 and January 2026 to 1,919, representing a 4.9% increase year-on-year. The current figures for February 2026 will be published on 19 May 2026. The IWH insolvency trend for partnerships and corporations – methodologically narrower and more up-to-date than the official statistics – recorded a 3% increase in insolvencies in April compared to the preceding month, and a 10% increase year-on-year.

Significant GDP growth at start of 2026

Economic development in Germany in the first quarter was rather more positive than had been expected on the basis of the available cyclical indicators. According to the Federal Statistical Office's Rapid Estimate of 30 April, gross domestic product in the first quarter of 2026 was 0.3% above the previous quarter’s level after price, seasonal and calendar adjustments. Back at the end of 2025, GDP had risen by +0.2%, although this figure was corrected downwards from the initial report of +0.3%.

Detailed statistics on the development in the first quarter have yet to be published, but the Federal Statistical Office says that both private and public-sector spending on consumption again contributed to the growth in GDP. In view of the dynamic development in exports, net foreign demand (exports minus imports) is also likely to have made an arithmetical contribution to growth. This means that economic activity at the beginning of the year – despite the escalation of the Middle East conflict since late February – is comparatively robust. In the short term, as also happened last year when U.S. tariffs were announced, some orders may have been brought forward in the light of impending price rises or supply chain bottlenecks for energy and raw materials due to the Middle East conflict. This is suggested by the renewed sharp rise in new orders, particularly for intermediate goods, in March. Even if the supply chains are coming under increasing pressure due to the conflict in the Middle East, and individual raw materials or products are not delivered, or are delayed, no general material shortages have been identified so far in German industry.

However, the signs of a significant weakening of the economy are becoming more prominent at the end of the first quarter. The indicators of German business sentiment have clearly deteriorated since the beginning of the Iran war. The fear of further rises in energy and raw material prices, and tangible increases in supply chain tensions, are also affecting companies outside the manufacturing sector, particularly in the chemical industry. The rising inflationary pressure and the growing uncertainty about the future course of the conflict are impacting demand and thus also business expectations in the more domestically oriented services sectors. The expectations of companies in the logistics sector in particular have worsened according to the ifo Business Climate Index. Companies providing more consumption-related services are feeling the restraint on the part of households; for example, consumer sentiment dropped to its lowest point for more than three years according to the HDE consumer barometer (in May) and the ifo Business Climate Index for the retail trade (in April), and the GfK Consumer Climate Survey also showed a further deterioration in May. This means that consumer spending, an important pillar of domestic demand, is likely to play a very restrained role in the coming months.

Only the ZEW Indicator of Economic Sentiment, which maps the views of investors and analysts, saw a slight recent improvement, but it remains well down in the negative area. Furthermore, volatility on the global energy, raw material and financial markets is likely to remain high, given the current uncertain prospects for a swift resolution of the conflict. The effects of the crisis-related energy and raw materials price rises in conjunction with uncertainties and possible supply bottlenecks are likely to be seen in the second quarter in particular, and to dampen cyclical dynamism. If the recovery expected for the second half of the year is to set in, a crucial role will be played by how long the conflict lasts and impedes trade routes, and how long production capacities remain affected. In view of the destruction of production facilities in the Middle East and the backlog caused by supply bottlenecks, it will likely take some time for trade and production capacities to return to more normal levels, even if there is a swift resolution.

Global economic prospects deteriorate due to Middle East conflict

Global industrial production continued to expand in February, rising by +0.6% month-on-month. Output expanded both in industrial and in emerging economies. In year-on-year terms, it was 3.5% higher. The leading indicators for the global economy have deteriorated since the outset of the war in Iran, but are continuing to point towards a development that is stable but weaker than previously expected. Following the preceding significant fall, the S&P Global World Purchasing Managers’ Index (PMI) rose slightly in April, from 51.0 to 51.8 points, in expectation of an incipient resolution of the conflict in the Middle East. The mood improved both amongst service providers (+0.4 to 51.2 points) and in industry (+1.3 to 52.6 points). Overall, however, the index remained below the levels seen before the Iran war and thus suggests that the rate of global expansion will be lower. Despite the fact that the conflict in Iran is still smouldering, stakeholders on the international financial markets continue to take a strikingly positive view of the global economy: in May, the Sentix sentiment index rose by 6.5 to 3.6 points, with improved market expectations for Asia and the U.S. in particular.

Global trade in goods has slowed down following a strong start to the year. In February, it expanded by 1.9% compared with January, following a 2.8% increase in the preceding month. It was well up on February 2025, by 8.0%. Ship movements and container handling data, however, suggest that global trade in goods slowed further in March. According to the RWI/ISL Index, global container throughput has recently dropped substantially due to the conflict in the Middle East and to rising costs for energy and transport, by 4.5 to 142.6 points. Whilst the downward trend in the northern European ports continued, throughput in China also recently declined. The International Monetary Fund’s Trade Monitor also indicates reduced dynamism in global trade in March.

Following the robust growth rates in global GDP of around three per cent in recent years, analysts are currently expecting the global economy to slow this year due to the energy price shocks caused by the war in the Middle East. The global economic outlook depends very much on how long the disruption to international shipping through the Strait of Hormuz lasts, and how long it takes to restore the production capacities for energy products in the Middle East. International trade in goods is also likely to slow down appreciably this year following the surprisingly strong development in 2025, in view of the energy price shock and of growing protectionism. On the other hand, the AI boom and the related investment and trade activity are likely to bolster international trade in goods, with the Asian economies in particular benefiting from this.

Foreign transactions clearly up in the first quarter

Following the clear rises in February, the dynamism of foreign trade weakened in the wake of the outbreak of the Iran war. Nominal exports of goods and services fell by 1.1% month-on-month in March (seasonally and calendar-adjusted). Whilst deliveries of goods to EU countries increased by nearly 3.4%, much less was exported than in February to third countries, and particularly to the U.S. and China. In the first quarter, exports of goods and services were still 2.9% up on the previous quarter. Nominal imports of goods and services continued their upward trend in March, growing by 1.4% compared with February, with more goods being imported both from the EU and from the rest of the world. In the comparison with the preceding quarter, imports were only 1.0% higher due to the weak start to the year. As imports increased and exports fell, the monthly trade surplus in goods and services declined by €3.8 billion to €6.8 billion.

Due to the blockade of the Strait of Hormuz and the related rises in energy and raw material prices, seasonally adjusted import prices rose sharply between February and March, by 3.6%. Export prices also rose appreciably, by 1.1%, but by less than import prices. The terms of trade saw a corresponding monthly deterioration of 2.4%. This means that, in real terms, exports probably saw a greater fall, and imports also probably saw a weaker development.

Against the background of persistent geopolitical and trade-policy tensions, the leading indicators remain volatile: ifo export expectations stabilised to some extent in April following the clear fall after the outbreak of the Iran war, rising from ‑0.7 to 0.1 balance points. While the automotive sector still tends to take an optimistic view of its foreign business, many energy-intensive sectors are anticipating a fall in exports. Foreign orders saw another substantial rise in March, up 5.6% month-on month. More orders – +10.1% – came from the eurozone in particular, but demand from other countries also rose by 2.7%. Broken down into product groups, the manufacturers of consumer goods in particular registered a sharp rise in new orders (+19.9%). Despite the recent pick-up in orders, which was likely bolstered by orders being brought forward due to the Iran war, overall foreign orders were only 0.3% higher than in the preceding quarter.

In the first quarter, foreign trade picked up some speed following the tariff-related effects in 2025. As a consequence of the geopolitical and trade-policy crises, uncertainties and looming supply chain disruption, the export industry is again challenged by increasing costs and slow foreign demand. The current quarter is therefore expected to see a slowdown in the development of exports.

Industrial production down for the fourth time in succession – new orders brought forward

In March, output in the goods-producing industry saw another slight fall. Adjusted for price, seasonal and calendar variations, it shrank by 0.7% compared with February, after February had seen a 0.5% fall. Year-on-year, it was down by 2.8%, adjusted for workday fluctuations. In the first quarter of 2026, output was 1.2% below that of the final quarter of 2025; in year-on-year terms, it was 1.3% down (adjusted for calendar effects).

Month-on-month, industrial production softened for the fourth time in succession, down by 0.9%. In contrast, the construction sector followed two weather-related declines by recording a clear plus of 1.9%  On the other hand, the energy sector had a clear setback of 4.0% following a strong start to the year.

The various groups of industrial products are seeing differing developments. Whilst the production of consumer (‑1.9%) and capital goods (‑1.6%) fell, output of intermediate goods rose slightly (+0.8%). Civil engineering (+8.0%), which is more dependent on the weather, benefited more than building (+4.0%) from the recovery in the construction sector. Finishing trades were flat (+0.0%).

Developments across industrial sectors were mixed. Output expanded in areas like cars and car parts (+1.9%), chemical products (+2.1%), electrical equipment (+2.3%) and computer equipment, electrical and optical products (+5.0%). In contrast, output in areas like mechanical engineering (‑2.7%), the production of metal products (‑2.4%) and pharmaceutical products (‑2.5%) fell.

Following the recovery in the last quarter of last year, industrial output softened appreciably at the beginning of 2026 – not least against the background of increased geopolitical uncertainties. In contrast to this, price-adjusted manufacturing turnover, which is another indicator of the industrial economy, continued to trend upwards. The positive development in turnover was driven by the producers both of intermediate goods and of capital goods, which include “other vehicle manufacturing”. The latter is particularly benefitting at present from public investment and procurement projects in the defence sector.

New orders in the manufacturing sector rose substantially in March 2026: the increase in the volume of orders compared with the preceding month stood at 5.0%, adjusted for price, calendar and seasonal fluctuations. In February, orders had already climbed by 1.4% (this figure has been adjusted upwards). In comparison to the preceding year, the rise was again strong, at 6.3% (adjusted for workday fluctuations). The slump at the beginning of the year means that the first quarter registered a fall of 4.1%.

In March, demand from abroad (+5.6%) saw a somewhat stronger rise than domestic orders (+4.0%). The largest rise in orders came from the eurozone (+10.1%), but third countries also generated significant new business (+2.7%).

In recent months, large-scale orders relating to public investment and procurement projects have resulted in highly volatile domestic orders. More recently, this effect has been much less pronounced. Excluding large orders, domestic orders rose by a clear 6.5% between February and March. In the case of total new orders, adjusted for large-scale orders, growth was only up slightly, at +5.1%.

In terms of product groups, intermediate goods recorded the strongest growth in orders (+9.2%). Orders of consumer (+7.3%) and capital goods (+2.1%) also rose clearly. In the year-on-year comparison, consumer goods saw the largest rise (+12.5%), whilst capital (+5.9%) and intermediate goods (+5.8%) were closer together.

Almost all sectors of industry recorded rises in orders in the monthly comparison. These included major sectors like cars and car parts (+2.9%), mechanical engineering (+6.9%), metal production (+3.4%) and the production of metal products (+3.7%). Producers of electrical equipment (+21.5%), computer and optical equipment (+14.4%) and pharmaceuticals (+9.4%) also registered a rise in orders. Other vehicle manufacturing, which includes military vehicles, recorded an ongoing rise in orders (+7.4%). The textile industry suffered from declining demand: tangible growth in February was followed by a slump of 26.4%.

New orders in the manufacturing sector have been trending upwards since August 2025. However, this trend is subject to some large monthly fluctuations due to large orders. The latest volatility is likely a result of the bringing forward of orders. The Iran war has caused an energy price shock, and this will feed through after some time into prices of other (upstream) goods. Against this background, it is likely that more orders were placed in March in the expectation of rising prices and potential supply bottlenecks.

Recent indicators of industrial sentiment have deteriorated further. These reflect the growing pressures on German exporters. This means that the industrial sector is likely to remain sluggish in the second quarter. Future developments depend very much on the further course of the conflict.

Retail sales decline; leading indicators weaken further

Price-adjusted retail sales (seasonally adjusted, excluding motor vehicles) fell by 0.8% in March compared with the preceding month, following an upward correction. Whilst non-food retail sales rose by 0.8% month-on-month, food sales dropped by 2.2%. Year-on-year, retail sales shrank by 0.7% in March, with non-food retail up 1.2%, while food sales declined by 2.7%. In the quarterly comparison, total retail turnover also showed a slight downward trend (‑0.7%), with non-food sales falling by 0.2% and food sales by 1.1%. Turnover in the hospitality sector was flat in price-adjusted terms in February, but rose by 0.4% in nominal terms. Compared with a year earlier, there was a real decline of 4.6% and a nominal increase of 2.3%.

Total new passenger car registrations rose by 0.5% month-on-month in April, but declined by 1.1% in the three-month comparison. Compared with the previous year, registrations were 2.7% higher. Passenger car registrations by private individuals rose slightly by 0.1% month-on-month and fell by 0.3% in the three-month-comparison. Compared with April 2025, new car registrations by private individuals were up 8.3%, following a 22.2% year-on-year rise in March – due not least to a weak reference period. Registrations by companies and self-employed persons increased by 0.8% month-on-month, but declined by 1.6% in the three-month comparison.

As the conflict in the Middle East continues, leading indicators for Q2 point to a more subdued outlook, as expected. According to GfK forecasts, consumer sentiment is expected to weaken further in May, seeing an even stronger fall than in the preceding month, down by 5.2 points to ‑33.3. A negative effect derived in particular from the collapse in income expectations, which had already fallen in March. The propensity to purchase also declined to a 2-year low, whilst the propensity to save fell back slightly, but remained at a high level. The HDE consumer barometer, which was published at the beginning of the month, continued its downward trend and registered its lowest figure for more than three years. The ifo Business Climate Index for retail (including motor vehicles) fell again in April, by more than in March, and now stands at ‑37.8 points. Assessments of the current situation have become appreciably more sceptical, and business expectations have slumped. Expectations of selling prices rose again, by significantly more than in the preceding month.

Recent sentiment indicators have seen a further significant deterioration, suggesting that the development in consumption will worsen appreciably in Q2 of 2026. Consumer uncertainty is gaining traction as the geopolitical conflicts continue and energy prices remain high as a consequence. Concerns are growing about the long-term effects of the Iran conflict on inflation and economic activity.

Inflation picks up again in April

In April, inflation rose temporarily to 2.9%, driving mainly by much higher energy prices, whilst core inflation remained stable at 2.3%. In particular the oil price, which stayed above 100 USD/barrel up to the end of April due to the war in the Middle East, increased the pressure on energy and consumer prices; in contrast, gas and electricity prices recently softened. The price of goods rose more strongly in March, services weakened slightly, and foodstuffs only saw a moderate increase. In the coming months, high energy and raw material prices are likely to continue to drive inflation, even if the temporary cut in the energy tax on gasoline and diesel should cushion this effect in May and June.

Decline in employment accelerates in first quarter

To a large extent, there is no spring recovery of the labour market this year. The number of people in employment fell by 25,000 in March (seasonally adjusted). At the same time, the Federal Statistical Office undertook significant downward corrections to the figures for the preceding months. The number of jobs subject to social security contributions also fell further in February, by 16,000. At the same time, unemployment rose by 20,000 people in April, and underemployment by 12,000. However, the latter figure may have been due partly to holiday-related special factors. The utilisation of short-time work probably stood at around 114,000 people in February; this was below the previous year’s figure, but higher than the January figure. On the basis of the notifications to the Federal Employment Agency by the end of April, the war in the Middle East is not yet leading to a significant rise in short-time work.

However, job prospects did deteriorate further due to the Middle East conflict. The willingness of companies to take on new workers is now as poor as it was during the COVID-19 pandemic. The ifo employment barometer worsened across the entire economy, and saw a particular slump in the services sector in April. Due to the demographic development, the job cuts seen in recent months have not resulted in an equivalent rise in unemployment. However, the prospects for jobs for the unemployed remain bad in view of the current underutilisation. Given the weak demand for labour and the rising uncertainty, the prospects of a pick-up in the second quarter are poor.

Corporate insolvencies remain at a high level

According to official statistics, the number of corporate insolvencies fell by ‑5.8% month-on-month in January 2026, to 1,919 filed cases, and was 4.9% higher than in January 2025. It is 15.2% higher than the 2016-2019 January average. The likely claims by creditors from the corporate insolvencies registered in January 2026 amounted to around €3.1 billion, well below the figure a year before (€5.3 billion). This fall, despite the rising number of corporate insolvencies, is due to the fact that fewer economically significant companies applied for insolvency in January 2026 than a year before. This effect had already been seen throughout 2025 compared with 2024.

The IWH insolvency trend for partnerships and corporations – methodologically narrower and more up-to-date than the official statistics – recorded 1,776 insolvencies in April, up 3% from the preceding month and 10% year-on-year. The number of employees affected (around 20,000) in the largest 10% of insolvent firms rose by 43% compared with the previous month and was 39% higher than in April 2025. This high number of affected employees in April is partly due to two large insolvencies in the retail sector, affecting nearly 6,000 jobs. On the basis of its own leading indicators, the IWH assumes that very high insolvency figures can be expected up to and including July.

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¹ This report is based on data that were available as of 13 May 2026. Unless stated otherwise, these are rates of change against the respective preceding period on the basis of price-adjusted figures which have also been adjusted for calendar-day and seasonal variations.