Germany’s economy stumbles into 2026 as weak trade and factory data cloud recovery hopes

Weak export and industrial data — recorded before the latest energy price shock triggered by the Iran conflict — are casting fresh doubt on whether the German economy can break free from years of stagnation.

“The German economy as a whole got off to a very weak start to the new year,” Carsten Brzeski, global head of macro at ING, told the Financial Times after January trade figures revealed a 2.3% month-on-month drop in exports and a 5.9% decline in imports.

The steeper-than-expected falls came a day after Germany’s federal statistics office reported that output in manufacturing — one of the country’s most critical sectors — contracted for the second consecutive month in January.

The figures predate the latest surge in oil and gas prices ignited by the Iran war, raising urgent questions about whether Europe’s largest economy can mount a meaningful recovery in 2026.

In a note to clients, Brzeski wrote that his optimism regarding Germany’s growth prospects had “taken a hit,” adding that domestic manufacturers were being squeezed by US tariffs and fierce competition from Chinese rivals.

New orders fell 11% in January, dragged down by a drop in high-value orders that have historically been volatile. Goldman Sachs economists observed that the sectoral decline was “very broad-based.”

The sharp contraction in imports in January — despite Germany’s trade surplus widening by 21% to €21 billion — may signal deeper structural weaknesses in the domestic economy.

“The fall in imports represents an upside risk to GDP growth this year,” wrote Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics.

Economists had placed considerable hope in Chancellor Friedrich Merz’s multi-billion-euro investment package to finally lift Germany toward stronger growth after years of recession. In 2025, the country’s GDP expanded for the first time since 2022, posting modest growth of 0.2%.

A better-than-expected 0.3% quarter-on-quarter expansion in the final three months of 2025 had bolstered optimism that growth could accelerate to 1% this year.

Germany’s closely watched Ifo business climate index rose slightly more than forecast in February, though investor sentiment as measured by the ZEW indicator fell unexpectedly, offering a mixed signal on the durability of any rebound.

The prospect of rising interest rates in the wake of the latest energy price shock presents an additional headwind. Madis Müller, governor of Estonia’s central bank, said on Tuesday that the next move in European Central Bank policy rates was more likely to be an increase than a cut — while cautioning at an event in Vilnius, Lithuania, that policymakers should not act hastily. The ECB is set to determine borrowing costs on March 19.

Economists at BNP Paribas, however, maintain that Germany’s ramping-up of public expenditure will be sufficient to pull the economy out of its prolonged slump. “While we remain optimistic on the overall growth outlook for the year, the recent data are a reminder that the recovery path may not be linear,” BNP economist Paul Hollingsworth told the FT on Tuesday. “Fresh increases in energy prices stemming from the Middle East conflict represent another source of downside risk.”