According to the current Monthly Report, German economic output is likely to tread water in the first quarter of 2026: Following the significant increase in the previous quarter, real GDP might merely stagnate in the current quarter in seasonally adjusted terms

Government stimuli still need time to take effect

Owing to its weak competitive position, German industry can derive only limited benefits from growth in global trade. In addition, as pointed out by the Bundesbank’s experts, capacity utilisation in industry remains low and continues to curb private investment. Moreover, stimulus from the government will take some time to exert an impact, with the central bank’s economists remarking that the easing of fiscal policy is unlikely to provide a marked boost until later in the year. The exceptionally high level of new domestic orders for the manufacture of other transport equipment and of weapons and ammunition in the fourth quarter of 2025 points to extensive government orders in the defence sector. However, it will probably be a while before these orders noticeably boost production.

A subdued start to the year for industry

According to the report, industrial output and sales presented a mixed picture in January but, overall, the figures point to a subdued start to the new year. The construction sector is being supported by an upward trend in demand for housing construction and civil engineering, but unfavourable weather conditions acted as drag in January and February.

Conflict in the Middle East bringing added burdens

The war in the Middle East is likely to place additional strain on households and enterprises, mainly through rising energy prices. These effects could already make themselves felt in the first quarter and are clouding the outlook for the second quarter. If the conflict drags on into the second quarter, the associated high level of uncertainty and a weaker global economy will probably create additional headwinds, the Bundesbank comments. Developments from the second half of the year onwards will also depend heavily on how long the conflict lasts and the extent to which the global energy supply is affected. 

Inflation outlook particularly uncertain at present

In the coming months, the inflation rate is likely to be driven mainly by the conflict in the Middle East and the resulting fluctuations in energy commodity prices, especially for oil and gas. The report explains that the rise in the price of crude oil will lead to a particular increase in fuel and heating oil prices for consumers in the short term. As a result, the inflation rate is likely to climb significantly towards the 3 % mark in the near future, the Bundesbank’s economists state. And there are upside risks to the inflation rate beyond that, too: if the war in the Middle East proves lengthier and the Strait of Hormuz – a key route for global trade in oil and liquefied natural gas – remains largely under blockade, it could mean a significantly higher inflation rate over a longer period of time.