The German economy recorded only modest growth in the first quarter, sustained primarily by solid industrial performance, strong business-related services and robust exports, the Bundesbank said in its monthly report on Wednesday. Despite those positives, the central bank warned that rising energy costs and uncertainty surrounding the Iran war are likely to curb momentum in the current quarter.
The Bundesbank noted that Europe’s largest economy has been essentially flat over the past three years. Officials cautioned that the outbreak of war in Iran now threatens government hopes that large planned investments in infrastructure and defense would provide the long-awaited lift to growth.
Although the conflict had already depressed consumer confidence toward the end of the first quarter, the Bundesbank said the overall economic performance for that period was largely unaffected. The central bank attributed this resilience to buoyant business-related services, rising industrial sales and continued strength in exports.
Looking forward, the Bundesbank expects only a slight expansion at best in the second quarter. It said more expansionary fiscal policy should gradually deliver increasingly positive impulses for the economy. At the same time, the bank warned that the war in the Middle East is likely to exert a broader and more noticeable drag on activity.
Specifically, the Bundesbank identified several channels through which the Iran war is affecting the economy: higher energy prices, renewed supply chain disruptions, elevated uncertainty, upward pressure on market-based interest rates and a weaker export outlook. The central bank highlighted that private consumption had been softening before the conflict and then suffered a clear setback in March as higher fuel costs reduced households’ purchasing power.
Measures of export and business expectations point to a more muted trajectory ahead, the Bundesbank said. The bank emphasized that this outlook reflects not only the direct burdens of higher energy costs and supply chain problems, but also growing concerns about weaker global demand in the wake of the conflict in the Middle East.
Implications for markets and sectors: The Bundesbank’s assessment signals pressure on export-oriented industries, manufacturing and transport from higher energy and logistical costs, while households and consumer-facing services face weaker spending due to reduced purchasing power.