According to the new Monthly Report, German economic output rose significantly at the beginning of the year. In the face of many burdens, the German economy is thus more robust than previously expected.

Exports of goods rose significantly

Industrial sales and exports of goods were robust in the first quarter of 2026. Industry received positive impetus from rising demand from Germany and abroad. The pick-up in exports was driven by exports to non-euro area countries, especially the United States.

Further deterioration in labour market

The Monthly Reports goes on to say that the labour market was unable to benefit from fairly strong economic growth in the first quarter. In addition to employment, the number of jobs subject to social security contributions also declined. In April, seasonally adjusted unemployment exceeded the three million mark for the first time since 2011. What is also striking, according to the report, is that the outlook in some services sectors became considerably gloomier after the start of the war in Iran. The Bundesbank’s economists noted that the decline in employment was significantly sharper than the rise in unemployment. This suggests that rising labour force participation and immigration are no longer sufficient to offset the demographic decline in labour supply.

Wage growth weaker, but still comparatively strong

In the first quarter of 2026, growth in negotiated wages was weaker than before, but still quite strong, at 2.8 %. “As things currently stand, wage growth is unlikely to accelerate over the coming months,” the Bundesbank’s economists write. As the macroeconomic outlook has deteriorated and the economy is not likely to recover as quickly as expected, it has become more difficult for trade unions to impose significantly higher wages without jeopardising jobs.

Inflation rate remains elevated

In the first quarter of 2026, consumer prices rose markedly compared with the previous quarter, mainly as a result of higher energy prices. Prices of fuel and heating oil, in particular, went up significantly in March, driven primarily by higher crude oil prices in the wake of the war in the Middle East. Services inflation eased somewhat but remained above average by historical standards. Following the significant increase in March, annual inflation edged up somewhat further to 2.9 % in April. It is likely to remain elevated over the coming months. However, the development of inflation depends, first and foremost, on how the war evolves and it is therefore very uncertain.

War in Iran weighs on economy

The German economy is expected to stagnate in the second quarter owing to the impact of the war in the Middle East. Higher inflation and the associated losses in purchasing power are weighing on private consumption and thus on consumer-related service providers, according to the report. High energy prices and greater supply bottlenecks are also a drag on industry and construction on the supply side. However, the Bundesbank’s economists also point to effects that are stabilising for some parts of industry: frontloading effects in anticipation of shortages may also have driven new orders. However, these effects are likely to be short-lived. The negative impact of the war is expected to place a mounting strain on industry in the coming months.