German economy grows in Germany; beats Bundesbank forecast

German economy grows in Germany; beats Bundesbank forecast

Commentary: German economyMonthly Report – July 2026

DE Monatsbericht – Juli 2026 EN Monthly Report – July 2026

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1 German economy withstanding headwinds

2 Industrial activity surprisingly robust

3 Service providers and private consumption subdued

4 Labour market still on a slightly downward track

5 Energy commodity prices showing high volatility

6 Inflation temporarily down to 2.4 % in June

Economic output in Germany is likely to have risen somewhat in the second quarter of 2026. In spite of headwinds created by the war in the Middle East, real GDP GDP: gross domestic product is likely to have increased somewhat in the second quarter of 2026 after seasonal adjustment. 1 1 Seasonal adjustment here and in the remainder of this text also includes adjustment for calendar effects, provided they can be verified and quantified. Industrial activity remained resilient. This is borne out by the data available for April and May. Industry is benefiting from dynamic foreign demand and growing exports. Consumers were relatively unaffected by the high energy prices and associated losses in purchasing power, and look to have kept their consumer spending at least stable. Finally, expansionary fiscal policy is supporting economic activity. Overall, the current picture painted by the indicators suggests a somewhat higher underlying pace of economic growth than was expected in the Bundesbank’s June Forecast for Germany. 2 2 See Deutsche Bundesbank (2026a). There are also temporary factors supporting growth. The data available to date show that real imports of goods were weak, probably as a result of the war in Iran. 3 3 Taken in isolation, weak imports increase net exports and GDP GDP: gross domestic product in arithmetical terms. However, in view of price rises and supply bottlenecks related to the closure of the Strait of Hormuz, inventory levels are likely to have been reduced in many places. This has probably dampened the overall effect of subdued imports on GDP GDP: gross domestic product . In addition, German exporters may have benefited from the fact that their international competitors (especially in Asia) were more affected by bottlenecks in the supply of intermediate goods. Moreover, it is possible that frontloading effects in anticipation of shortages and price rises stabilised parts of the industrial sector. Construction output is also likely to have increased significantly despite higher interest rates for building finance. However, a large part of this growth is attributable to a turnaround after the previous quarter’s weaker level in the face of adverse weather conditions. In the third quarter – provided the situation in the Middle East does not intensify further – the burdens stemming from the war could be smaller than on average in the second quarter. 4 4 Overall, energy commodity prices are currently at a similar level to that assumed in the Forecast for Germany of 12 June 2026; see Deutsche Bundesbank (2026a). At the same time, though, the temporary supporting factors from the second quarter are also likely to reverse or dissipate. GDP GDP: gross domestic product growth could then be somewhat weaker overall.

German industry is proving surprisingly robust given the war in Iran and probably made a positive contribution to gross value added. Both output and sales in the industrial sector rose in May from their April levels. Averaged over April and May, too, industrial activity picked up quarter on quarter, rising slightly based on industrial output data and significantly based on price-adjusted industrial sales. According to the data, developments were particularly favourable in the production of intermediate goods and in energy-intensive sectors. Due to the war in the Middle East, German manufacturers of primary materials and chemical products experienced increased demand. This was possibly also because their buyers frontloaded orders, fearing supply bottlenecks and price rises. At the same time, German manufacturers likely benefited from less stretched supply chains than international competitors (especially Asian countries). By contrast, output in the German automotive industry probably declined. In this sector, production and sales growth in May was unable to make up for the significant decline in April. The figures already reported up to June by the German Association of the Automotive Industry ( VDA VDA: Verband der Automobilindustrie ) also point to stagnation at best in the second quarter. Sentiment indicators are broadly robust in proportion to the international pressures. For example, the assessment of the situation in the manufacturing sector once again improved significantly in the second quarter, according to the ifo ifo: economic research institution Institute, and deteriorated only slightly in July. S & P S&P: Standard & Poor’s Global’s Purchasing Managers’ Index was also consistently above the expansion threshold.

Foreign demand for German industrial goods remained dynamic. New orders rose in May as against April. They were also distinctly higher than the previous quarter’s level when averaged over April and May – both including and excluding the often volatile large orders. Continued brisk momentum in external trade is overshadowing subdued domestic demand. Growth was mainly attributable to additional orders for intermediate goods, especially for chemical and metal products. In addition, the manufacture of other transport equipment again played a key role in the increase as well. In contrast to the improved business situation and favourable order growth, firms’ export and business expectations deteriorated considerably on average in the second quarter, according to the ifo ifo: economic research institution Institute. They, too, have now bottomed out, however. Industrial enterprises were less pessimistic about the future in July than on average in the second quarter.

The services sector may have grown slightly in the second quarter. Output in the services sector (excluding trade) picked up again distinctly in April – the latest month for which data are available – compared with the weak March. It thus reached a level slightly higher than the previous quarter’s average. As for further developments, the available sentiment indicators paint a mixed picture. The ifo ifo: economic research institution business climate index for service providers declined somewhat due to the war in the Middle East, but improved again in June and July, almost returning to its pre-war level. At the same time, S & P S&P: Standard & Poor’s Global’s Purchasing Managers’ Index fell well below the expansion threshold and remained just below it in July as well.

Private consumption may have provided some support for service providers’ activity. Consumption indicators remained surprisingly stable amid price increases and losses in real income stemming from the war in the Middle East. Real sales in accommodation and food services, which are available up to May, were below the previous quarter’s level on average. However, sales in the retail sector (excluding motor vehicles) were more favourable, with the average coming in slightly above the previous quarter’s average. In addition, the ifo ifo: economic research institution Institute’s survey of firms for both consumer sectors points to a somewhat less pessimistic assessment of the business situation in June and July. Finally, household passenger car registrations recently saw a marked rise, especially for electric vehicles, according to VDA VDA: Verband der Automobilindustrie data. 5 5 The number of registrations for electric vehicles has been rising significantly since March. In addition to a wider selection of models, this is likely also due to the new government subsidies for private buyers. Vehicles newly registered since 1 January 2026 are eligible for the subsidies. However, there was still some administrative uncertainty up until publication of the final subsidy conditions and the launch of the application portal on 19 May 2026; this may have led some households to defer purchases or registrations for a time. The increase in June was also supported by a higher number of working days. See German Association of the Automotive Industry (2026). That said, consumers’ propensity to buy was depressed overall in the second quarter, according to the GfK GfK: market research institution survey, but improved a little in July. Although consumers’ economic and income expectations have recovered again discernibly compared with the lows when the war in Iran began, they are still well below pre-war levels. Moreover, the purchasing power of real disposable income is still diminished and labour market developments also remain weak.

The moderate decline in employment in the economy as a whole continued in the second quarter, with further significant job cuts in industry. In May, employment in Germany declined on the month after seasonal adjustment, falling by 8,000 to 45.82 million persons. Employment thus dropped only slightly, as in April, after the significant contraction in the first quarter. Employment subject to social security contributions saw a moderate decrease; the first estimate of this is available for April. However, the number of jobs in manufacturing continued to fall considerably. Headcounts were also reduced on a smaller scale in temporary agency work and trade. Employment remained stable in the construction sector. As has been the case for some time now, additional labour was needed primarily in healthcare and social services. This was also true of business-related services to a lesser extent. In addition to employment subject to social security contributions, there was also a decrease in the number of exclusively low-paid part-time employees and the self-employed.

Leading indicators show no signs of a recovery in the labour market over the coming months. The ifo ifo: economic research institution employment barometer, a survey of employment plans in the business community over the next three months, remains deep in negative territory and fell again in June. The employment component of the IAB IAB: Institute for Employment Research labour market barometer, which also encompasses publicly funded sectors, fell minimally below the neutral threshold after a slight deterioration. This signals a broadly stable level of employment in the aggregate economy. The number of vacancies reported to the Federal Employment Agency remained virtually unchanged once again. In particular, an extremely low number of new job vacancies were received. The labour market is thus not expected to see strengthening growth in the short term.

Unemployment recently fell slightly. The number of persons officially registered as unemployed was 2.98 million in June in seasonally adjusted terms. The unemployment rate held steady at 6.3 %. Unemployment covered by the statutory unemployment insurance scheme, which is closely linked to cyclical developments, continued to rise over the period under review. However, the number of unemployed people receiving the basic welfare allowance decreased. Total underemployment fell somewhat more sharply than registered unemployment. This is likely because of a slight decline in the number of people engaged in labour market policy measures. According to the IAB IAB: Institute for Employment Research unemployment barometer, unemployment will probably barely increase over the next few months. This leading indicator has been rising for several months now and is slowly approaching the neutral threshold.

Following sharp declines in June, energy commodity prices picked up again significantly in July. The main reason for the initial decline in