The Economic Situation in Germany in July 2026¹

The economic situation in Germany has brightened slightly at mid-year. After the escalation of the war in the Middle East weighed noticeably on economic activity in the spring through higher energy prices and supply chain disruptions, the latest indicators point to a cautious economic stabilisation. The framework agreement reached between the United States and Iran in mid-June, together with the subsequent marked decline in oil prices, is likely to have contributed to an improvement in sentiment. Nevertheless, uncertainty regarding the future course of the conflict remains high in view of the renewed air strikes in Iran. In addition, the elevated energy and raw material prices are likely to dampen economic activity in the second quarter as a result of higher costs for businesses and losses of purchasing power among households. Over the remainder of the year, provided energy-price-related pressures continue to ease, a cyclical recovery can be expected, supported by the Federal Government’s fiscal stimulus. Industrial activity stabilised towards the middle of the second quarter. Both new orders and output increased compared with the previous month. In the less volatile three-month comparison, however, they were broadly flat. In view of the still high level of geopolitical uncertainty and ongoing supply bottlenecks, the outlook for industry remains subdued. Price-adjusted retail turnover (seasonally adjusted, excluding motor vehicles) rose by 1.1% in May compared with the previous month. Year-on-year, the retail sector recorded growth of 1.5% in May, driven primarily by growth in non-food retail sales. New passenger car registrations by private individuals continued their upward trend in June, rising strongly once again both compared with the previous year and in the three-month comparison. Sentiment has recently continued to stabilise at a low level, but remains fragile. The inflation rate fell to +2.3% in June, after +2.6% in May. Core inflation (excluding energy and food) remained elevated and unchanged at +2.5%. Energy and food price increases made only a small contribution to inflation. The labour market entered the summer months with little momentum: seasonally adjusted unemployment was broadly unchanged in June, declining by 1,000 persons compared with the previous month. Gainful employment fell by 8,000 persons in May, and employment subject to social insurance contributions declined by 5,000 persons in April. In view of persistently weak demand for labour and ongoing structural adjustment processes, there is currently no indication of an improvement in the labour market outlook. The number of corporate insolvencies remains high. According to official statistics, a total of 24,599 corporate insolvencies were reported from May 2025 to April 2026 (8.3% rise year-on-year). The IWH insolvency trend, which is two months ahead of the official statistics, shows that 18,368 insolvencies of partnerships and corporations were reported from July 2025 to June 2026 (8.8% rise year-on-year).

Cautious stabilisation in a fragile global environment

The economic situation and outlook brightened somewhat by mid-year following the framework agreement reached between the United States and Iran in mid-June and the resulting marked decline in energy prices. Output in the goods-producing sector increased slightly in both April and May, with the construction sector in particular providing a significant boost as it recovered from the weather-related slump at the beginning of the year. Industrial output also increased somewhat over the past two months, with higher demand benefiting not only the manufacture of motor vehicles and motor vehicle parts, but also energy-intensive sectors such as the chemical industry and the manufacture of fabricated metal products.

Against the backdrop of negotiations aimed at resolving the Iran conflict, indicators of business sentiment improved in June: both the ifo business climate index for manufacturing and the S&P Global Purchasing Managers’ Index increased, pointing to a further modest recovery over the course of the second quarter. Consumers also appeared somewhat more optimistic about the future recently, despite energy-price-related losses of purchasing power and the persistently weak labour market. This is indicated both by the latest increase in the GfK Consumer Climate Index and by the HDE Consumer Barometer, albeit from a low level. This shows that income and economic expectations in particular improved; this brighter outlook was also reflected in the recovery of retail turnover in May and the ifo Business Climate Index for retail trade in June, with both the assessment of the current situation and business expectations improving. In the services sector as a whole, the latest output data, currently available up to April, indicate a stabilisation following the slump in March. This was driven primarily by consumer-related services, whereas business services had been slightly declining most recently.

Notwithstanding these somewhat more positive indicators, the sharp increase in energy and raw material prices in recent months, which remain elevated, is likely initially to continue weighing on economic activity through rising costs for businesses and losses of purchasing power among households. Moreover, uncertainty regarding the future course of the conflict and developments in energy prices remains high in view of the recent military escalation in the Middle East and the renewed disruption to shipping through the Strait of Hormuz. Over the coming months, industrial activity is likely to remain caught between rising new orders and expanding order books, particularly in energy-intensive industries and other vehicle manufacturing, and supply chain disruptions that may only gradually ease, less favourable financing conditions, and elevated raw material and energy costs. The sharp decline in the Truck Toll Mileage Index in June also points to a recent weakening of industrial output in the latest period. Among households, the loss of purchasing power to date, together with the continuing geopolitical uncertainty, is likely initially to continue dampening consumer sentiment, as reflected in the persistently low propensity to purchase. Over the remainder of the year, provided energy-price-related pressures continue to ease, fiscal stimulus is likely to have a stronger impact and support the expected cyclical recovery. Over the medium to long term, the Federal Government’s latest reform agenda is aimed at improving structural framework conditions, placing the social security systems on a sustainable footing and thereby strengthening the competitiveness of the German economy.

Global economy so far showing limited impact from the Middle East conflict, supported by AI boom

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.

Foreign trade remains on an upward trend despite a temporary setback

Following the positive momentum in April, foreign trade experienced a setback in May. Nominal exports of goods and services fell by a seasonally and calendar-adjusted 2.4% compared with April, having previously risen by 4.2%. Whilst exports of goods to EU Member States declined, shipments to the rest of the world increased. Exports of goods to the United States, in particular, rose sharply, returning to their March 2025 level after a pronounced tariff-related period of weakness. Trade with China also recorded a notable increase. At the same time, services exports declined by 4.6%. Overall, however, exports of goods and services remained on an upward trend: since January, they have been 3.4% higher than in the corresponding period of last year. Nominal imports of goods and services fell by 4.8% in May compared with the previous month. Fewer goods were imported both from the EU and from third countries, although imports from the United States also increased. Services imports declined by 3.4% month-on-month. Since the beginning of the year, imports of goods and services have nevertheless remained 3.7% above their level in the same period of last year. Following declines in the preceding months, the monthly surplus on trade in goods and services increased by €3.6 billion to €12.0 billion in May.

Following the sharp increases of recent months, import prices continued to rise in May, increasing by a seasonally adjusted +0.8% over the previous month. Imported intermediate goods, in particular, contributed to upward price pressure, whilst import prices for refined petroleum products fell slightly for the first time since December 2025. Export prices increased by 0.5% over the same period. As a result, the terms of trade deteriorated for the fifth consecutive month, declining by a further 0.2% from April to May. In real terms, the declines in both exports and imports are therefore likely to have been more pronounced.

Despite the continuing underlying tensions in the Middle East, leading indicators present a somewhat more favourable picture than in previous months. The ifo export expectations improved slightly in June, rising by 2.0 points to -3.7 points. The electrical engineering industry expects exports to increase significantly, whilst the chemical industry anticipates only a slight decline in foreign business following the sharp downturn seen previously. By contrast, both the automotive and metal industries continue to expect exports to decline.

Following the setback in the previous month, foreign orders rose again in May, increasing by 2.2% compared with April and standing 4.9% higher in the three-month comparison. Orders from the eurozone recovered (+11.2%), primarily driven by new orders in the other transport equipment sector, whilst demand from third countries declined (-3.2%).

Despite the energy price shock, global trade has remained resilient, largely reflecting strong trade momentum in Asia associated with the AI boom. The recent decline in oil prices is also likely to provide additional support to global trade. Nevertheless, trade policy and geopolitical uncertainty remain elevated, and further adjustments to US tariffs are expected from the end of July. Overall, the sales prospects for German exporters remain challenging.

Orders and output stabilise

Output in the goods-producing sector increased noticeably in May. Adjusted for price, calendar and seasonal effects, it rose by 0.9% compared with the previous month and, on a calendar-adjusted basis, has now returned to the previous year’s level. In the less volatile three-month comparison, output was broadly unchanged from the preceding three-month period (+0.1%). The decline in output recorded during the winter months has therefore been almost entirely reversed.

Having been driven primarily by energy production and construction earlier in the year, output in manufacturing also increased again in May (+0.8%). However, industrial production remained well below the previous year’s level (-1.0%). Construction output rose by 0.9% compared with April and was up 3.5% year-on-year. Energy output also expanded by 0.8% in May, remaining well above last year’s level (+2.0%).

Within industrial manufacturing, producers of capital goods (+1.3%) and consumer goods (+1.2%) both reported a marked increase in output. Capital goods production thus expanded for the first time this year, although it remained well below last year’s level (-2.7%). By contrast, output of intermediate goods declined slightly compared with the previous month (-0.4%).

Growth in construction output in May was driven by finishing trades (+1.5%). Building construction remained weak (-0.4%), while civil engineering recorded a setback (-1.0%) following strong weather-related catch-up growth in the previous two months. Year-on-year, however, output in civil engineering remained well up (+4.6%).

Performance varied across the individual branches of industry: while output increased significantly in the manufacture of motor vehicles and motor vehicle parts (+3.6%), computer, electronic and optical products (+2.3%), fabricated metal products (+1.7%) and chemicals (+1.0%), it declined in other transport equipment (-4.0%), electrical equipment (-1.4%), pharmaceutical products (-0.5%) and machinery and equipment (-0.5%). Output in the energy-intensive industries continued the upward trend observed since the beginning of the year, albeit at a slower pace (+0.2%), leaving it almost 3% above the previous year’s level.

The modest increase in output in the goods-producing sector in May was driven primarily by the positive performance of construction and the energy sector. Although industrial output has recently regained some momentum, it continues to show considerable variation across sectors, with pronounced fluctuations between individual industries.

The order situation also stabilised towards the middle of the second quarter: in May, new orders in manufacturing rose by 1.9% month-on-month on a price-, calendar- and seasonally adjusted basis. Large-scale orders again played an important role; excluding these, the increase amounted to 1.0%. In the less volatile three-month comparison, total order volumes edged down by -0.2%. In year-on-year terms, however, demand in May was 6.2% higher after adjustment for working-day effects.

External demand (+2.2%) increased more strongly than domestic demand (+1.3%). However, orders from non-eurozone countries fell (-3.2%), while demand from the eurozone rebounded strongly (+11.2%).

By category of goods, consumer goods recorded the strongest increase (+2.4%), followed by capital goods (+2.2%). Orders for intermediate goods increased at a below-average rate (+1.4%). In the three-month comparison, however, capital goods orders declined (-4.2%), whereas orders for consumer and intermediate goods continued to trend upwards (+4.9% and +5.4% respectively).

Across individual industries, other transport equipment recorded a surge in orders of 85.0%, driven by large domestic and foreign contracts. Order books also became noticeably fuller in other important sectors, including electrical equipment (+5.7%), machinery and equipment (+3.7%), basic metals (+3.4%) and pharmaceuticals (+1.7%). By contrast, several sectors recorded significant declines in new orders, including motor vehicles and parts (-3.8%), computer, electronic and optical products (-7.8%) and fabricated metal products (-3.1%).

Following the outbreak of the conflict in the Middle East, demand was initially supported by front-loading effects, which were followed by an expected setback. More recently, however, new orders in the manufacturing sector appear to have resumed the upward trend that began in the second half of 2025. At the same time, developments remain highly volatile owing to the influence of large-scale orders.

Although shipping through the Strait of Hormuz has recently resumed, uncertainty over the normalisation of trade flows remains high. Against the backdrop of still-volatile new orders and ongoing supply chain disruptions, a broad-based recovery in industrial activity is not yet in sight.

Retail sales increase; leading indicators continue to point to stabilisation

Price-adjusted retail sales (seasonally adjusted, excluding motor vehicles) rose by 1.1% in May month-on-month, with food and non-food retailing recording broadly similar increases. Year-on-year, retail sales increased by 1.5% in May, driven primarily by growth in non-food retail sales (+2,4%). Sales of motor fuels (filling stations) once again acted as a drag, falling by 6.1% over the previous year, while online and mail-order retailing expanded by 7.0%. In the three-month comparison, overall retail sales were unchanged, with non-food sales increasing by 0.9% and food sales declining by 1.0%.

Price-adjusted turnover in the hospitality sector stagnated in April, while nominal turnover rose slightly by 0.4%. Compared with the same month last year, real turnover fell sharply by 7.1%, whereas nominal turnover increased by 0.7%.

Growth in overall new passenger car registrations slowed to 0.2% month-on-month in June. Year-on-year, however, registrations increased strongly and, in the three-month comparison, continued to record a marked rise of 1.4%. While registrations of diesel and petrol cars fell significantly, demand for electric vehicles and hybrid cars continued to grow strongly. Against the backdrop of the federal support scheme for electric vehicles, new registrations by private individuals rose particularly strongly compared with June 2025 (+28.6%). They also increased by 2.1% month-on-month and by 11.1% in the three-month comparison. Registrations by companies and the self-employed were also well above last year’s level (+9.3%). Compared with May, however, they fell noticeably (-0.9%) and were stagnated in the three-month comparison.

Following the sharp declines triggered by the conflict in the Middle East, leading indicators of private consumption stabilised with the start of negotiations between the United States and Iran aimed at resolving the conflict, although they continue to paint a subdued picture. According to GfK forecasts, consumer confidence is expected to stabilise at a low level in July, edging up by 0.5 points to -29.2. The slight improvement in income expectations in June, following a much stronger increase in May, made a positive contribution. Households’ willingness to make major purchases declined marginally, while the propensity to save remained unchanged. The HDE Consumer Barometer increased again in June but remained well below the previous year’s level. The ifo Business Climate Index for retail (including motor vehicles) rose by 4.8 points in June to -32.4. Both business expectations and assessments of the current situation improved. Selling price expectations also increased again, although they remained below the April level, which had marked a three-year high of 44.5 points. Overall, sentiment has continued to stabilise in recent weeks but remains fragile and subdued. Despite this modest improvement, leading indicators still do not point to a recovery in consumer spending in the second quarter of 2026. In particular, the difficult negotiations between the United States and Iran, together with the continuing critical situation in the Middle East and its repercussions for the global economy, are likely to keep consumer uncertainty elevated. By contrast, lower crude oil prices and the associated decline in inflation expectations are likely to provide some support.

Inflation slightly down in June

The inflation rate fell to 2.3% in June, down from 2.6% in May. Core inflation (excluding energy and food) remained elevated and unchanged at +2.5%. Increases in energy and food prices made only a limited contribution to overall inflation. Price pressures are likely to ease only gradually. The ifo price expectations have recently risen significantly. According to ifo, companies in particular in retail, but also in manufacturing and services, are planning considerably more price increases than price reductions. In addition, the expiry of the temporary reduction in the energy tax on petrol and diesel at the end of June is likely to push inflation up slightly again.

Labour market enters the summer months without momentum

The decline in employment continued recently, albeit at a slightly slower pace. Seasonally adjusted employment fell by 8,000 people in May, while employment subject to social security contributions declined by 5,000 people in April. The seasonally adjusted number of unemployed remained broadly unchanged in June, edging down by 1,000 people. At the same time, underemployment decreased by 8,000 people. The number of people on short-time work declined slightly in April and, at 133,000, is likely to have been around 100,000 below the previous year’s level. According to preliminary figures, short-time work notifications are likely to have remained broadly unchanged in June. The effects of the ongoing conflict in the Middle East have therefore not yet had any direct impact on the labour market.

Labour market leading indicators remain weak at the beginning of the third quarter. Employment expectations have deteriorated further, particularly in retail and the services sector. Although the number of vacancies registered with the Federal Employment Agency has stabilised compared with the same period a year ago, the number of new vacancies continues to be very low. Alongside weak labour demand and high geopolitical uncertainty, developments in the labour market are being shaped by structural adjustment processes resulting from the growing importance of artificial intelligence and the effects of demographic change. Although the pace of employment losses and the rise in unemployment have recently slowed, there are still no signs of improvement in the labour market outlook.

Corporate insolvencies remain at a high level

According to official statistics, a total of 24,599 corporate insolvencies were reported from May 2025 to April 2026 (8.3% rise year-on-year). In April 2026, the number of corporate insolvencies fell by 1.4% month-on-month to 2,276 cases; however, it was 7.1% higher than in April 2025.

The IWH insolvency trend, which is two months ahead of the official statistics, shows that 18,368 insolvencies of partnerships and corporations were reported from July 2025 to June 2026 (8.8% rise year-on-year). In June, the number of insolvencies rose by 12.1% month-on-month to 1,702 cases, and was 20.3% higher than in June 2025. The IWH concludes that insolvencies involving partnerships and corporations remained at an exceptionally high level in June and, based on its own leading indicators, expects insolvency figures in the third quarter of 2026 to remain above their level a year ago.

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¹ This report is based on data that were available as of 13 July 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.