German economy slows as Middle East war clouds outlook

The German economy experienced modest growth in the first quarter, supported by strong performance in industrial production and the services sector. However, soaring energy prices and uncertainties related to the Middle East war are expected to weigh on the current quarter, the Bundesbank said on Wednesday.

The euro zone’s largest economy has been stagnant for three years, and the war in Iran now threatens Berlin’s hopes of reviving investment plans in infrastructure and defense to boost growth.

The Middle East war had already impacted consumer confidence at the end of the first quarter, but the overall economic performance is expected to remain largely unchanged thanks to the strong performance of the business services sector, increased industrial sales, and healthy exports, the German central bank stated in its monthly report.

However, headwinds are strengthening, it warned.

“For the second quarter, we expect at best a slight expansion,” the Bundesbank report noted.

“The increasingly positive impulses from a more expansionary fiscal policy should be felt… Conversely, the repercussions of the Middle East war are expected to have a broader and more pronounced impact on the German economy,” it added.

The Bundesbank highlighted that the war has led to a surge in energy prices, supply issues, increased uncertainty, rising interest rates, and dimming export prospects.

Private consumption, already weak before the conflict, took a significant hit in March as fuel price increases reduced household purchasing power.

“Forecasts for exports and businesses indicate gloomier prospects,” the Bundesbank stated.

“This is probably due not only to the burden of rising energy costs and supply chain disruptions but also to concerns about weakening global demand following the Middle East war,” it said.

(Authored by Balazs Koranyi; Editing by Diana Mandia and Blandine Hénault)