German economic recovery temporarily interrupted

“German economic output is likely to have stagnated in the third quarter of 2026,” the Bundesbank writes in its current Monthly Report. Following the marked increase in the first half of the year, seasonally adjusted real GDP probably did not rise further in the third quarter. The economists attribute this interruption of the upward trend to temporary stress factors, however. These include the low water levels on the Rhine, the loss of competitiveness in the context of the Iran war and one-off effects related to the fuel rebate. In addition, high energy prices weighed on households’ purchasing power. By contrast, construction output increased again in August. However, the renewed rise in interest rates for building finance is likely to have a dampening effect going forward, according to the report.

Industry suffers setback in third quarter

According to the economists, the automotive industry was the main factor behind the continued weakness in industrial output in August. In addition to the generally weak development, the timing of factory holidays, which occurred in August to an unusually large extent this year, is likely to have played a role here. In energy-intensive economic sectors such as the manufacture of refined petroleum products and the chemical industry, the low levels of important waterways, such as the Rhine, made transport more difficult. Re-routing led to higher transport costs. Alongside the loss of competitiveness in the wake of the Iran war, restrictions on inland water transport are likely to have contributed to the markedly weaker foreign trade. 

Labour market with slightly positive outlook

In August, employment in Germany was down on the month after seasonal adjustment, falling by 29,000 to 45.62 million people. This is likely to have mainly affected persons in exclusively low-paid employment. The outlook for the next three months, as reflected in leading indicators such as the ifo employment barometer, has been slightly positive recently. “The number of new job vacancies appears to have bottomed out […]”, the Monthly Report states. After seasonal adjustment, registered unemployment was virtually unchanged at 3 million people in September, which corresponds to a rate of 6.4 %.

Inflation rises significantly

Owing to the sharp rise in energy prices caused by the ongoing conflict in the Middle East, the inflation rate rose significantly in September. The year-on-year rate of the Harmonised Index of Consumer Prices (HICP) stood at 3.3 % in September, up from 2.9 % in August. “This is the highest rate since the end of 2023,” the Bundesbank’s economists remark. They expect inflation to remain elevated over the coming months. Energy prices are set to stay high, with increasing indirect effects on industrial goods, food and services. Moreover, the health reform entering into force at the beginning of 2027, which raises prescription charges and fees for hospital services, and the expiry of the fuel rebate are expected to drive up inflation markedly.