The German economy is likely to grow only slightly in the third quarter of 2026, according to the current issue of the Bundesbank’s Monthly Report. Real gross domestic product will expand only a little in the current quarter in seasonally adjusted terms. It had increased significantly in the two preceding quarters. 

In general, however, the German economy will not stray from its path to recovery, according to the economists. This is because the slower pace of the recovery stems from temporary factors. Catch-up effects should come into play once these factors subside.

Low water levels weighing on industry

In July 2026, output and sales in the industrial sector were down significantly on the month and on the quarter in seasonally adjusted terms. On the one hand, the Rhine’s low water levels impaired the transport of goods, and transport costs rose sharply. This affected sectors such as the manufacture of chemicals, metals, coke and refined petroleum products. Price-adjusted goods exports also dropped markedly in July.

On the other hand, output was dampened by one car manufacturer suspending production at its plant for several weeks. Production in the automotive industry is likely to return to normal as of August, however.

The order situation in industry has improved, according to the Monthly Report. New orders recorded another sharp increase in July. However, this was mainly driven by large orders. The underlying trend in demand is still heading upwards overall. This means that the conditions are in place for industry to return to its recent, more robust pace of activity once the negative one-off effects have dissipated, the report states.

Gradual recovery in construction

Construction output rose significantly at the start of the quarter, according to the report. In July, output increased across all sectors, thus returning to the average level in the second quarter. New orders were on a favourable track, especially in civil engineering. 

Overall, the economists expect the recovery in construction output to continue. They note that the pressure on the construction sector’s supply chains due to the Iran war and low water levels looks to be moderate based on the available data. Civil engineering is likely to continue to benefit from infrastructure investment by central government. Conversely, the recovery in building construction and, in particular, housing construction is likely to progress only slowly due to high interest rates for building finance and rising construction costs.

Labour market showing initial signs of stabilisation

In July 2026, employment fell by 14,000 to 45.66 million persons after seasonal adjustment. The decrease mainly affected people in exclusively low-paid part-time work and the self-employed. Nonetheless, jobs continued to be shed in manufacturing and trade. Additional labour was needed primarily in healthcare and social services, according to the report.

Leading indicators of employment suggest that the labour market could stabilise in the coming months. For example, the ifo employment barometer rose considerably in August. The barometer reflects employment plans in trade, industry and services over the next three months. The Federal Employment Agency also received more new vacancies for jobs subject to social security contributions – the most it had seen since early 2024.

Unemployment remained heightened. In August, 2.996 million people were registered as unemployed in seasonally adjusted terms. The unemployment rate was unchanged at 6.4 %.

Energy prices driving inflation

Energy commodity prices picked up again sharply in August and September. According to the report, this was mainly due to the renewed escalation of the conflict in the Middle East after the memorandum of understanding between the US and Iran stalled. As a result, export prices went up for natural gas and petroleum products in particular. Wholesale prices for electricity, diesel and petrol also increased sharply. “Taken together, European energy commodity prices are thus now at their highest level since the Iran conflict began,” the economists report.

The Monthly Report notes that higher energy prices have already fed through to consumer prices. Inflation as measured by the Harmonised Index of Consumer Prices (HICP) rose from 2.8 % in July to 2.9 % in August. Core inflation excluding energy and food remained at 2.6 %.

The economists write that inflation is likely to remain elevated for the time being: For example, the latest futures prices suggest that the current exceptionally high difference in prices between crude oil and refined products, such as petrol and diesel, will shrink at only a very gradual pace. In addition, the planned health reform could temporarily push up the inflation rate at the start of 2027. Persistently high prices for crude oil, as well as for gas and electricity, could amplify direct and indirect effects and delay the return to an inflation rate of 2 %, the report concludes.