Economic output in Germany is likely to have risen slightly in the first quarter of 2026. In spite of ongoing strains and additional headwinds as a result of the war in the Middle East, real GDP is likely to have increased slightly in the first quarter of 2026 after seasonal adjustment. 1 Survey data collected by the ifo Institute and S&P Global for March still point towards a situation that is stable overall. This suggests that, for the most part, the negative effects of the war in the Middle East will likely not play out until later. Furthermore, the available economic indicators for January and February imply a slight expansion overall. For industry, in particular, the picture painted by the indicators is somewhat better than it was a month earlier. 2 Rising industrial sales and goods exports point to a slightly positive contribution to growth. Nonetheless, a host of strain factors continue to dampen the underlying cyclical trend. Industry, for instance, is suffering from structural barriers to growth, which are undermining its competitive position. Capacity utilisation remains at a low level and is dampening firms’ propensity to invest. According to January’s Bank Lending Survey (BLS), lending policies have become more restrictive; this is likely to act as an additional drag. 3 Credit standards were tightened on loans for house purchase, too. In addition, interest rates for building finance carried on rising. The construction sector is likely to have suffered a setback, primarily as a result of the unfavourable weather conditions in January and February. By contrast, the services sector is likely to have provided a positive boost to growth, as activity there expanded significantly in January. This is particularly true in the case of business-related service providers. Consumer-related areas of the services sector, meanwhile, did not match those same levels of expansion. Private consumption thus probably faltered after its strong finish for 2025. In March, it is also likely to have suffered from a marked deterioration in purchasing power as a result of higher oil prices. Looking ahead to the second quarter, a further, slight expansion is the most that can be expected as things currently stand. On the one hand, increasingly positive impulses stemming from the more expansionary fiscal policy are likely to come into play. On the other hand, the effects of the war in the Middle East are set to weigh on the German economy to a broader and more noticeable extent. Their impact is felt especially through higher energy prices, supply chain problems, elevated uncertainty, higher interest rates and a poorer outlook for exports. 

While the indicators gave partially mixed signals, industry proved comparatively robust overall. Averaged across January and February, output remained below the level of the previous quarter, but price-adjusted sales went up. The increase in sales was mainly driven by growth in foreign sales. This is consistent with the fact that exports of goods also rose substantially in February, and their average for the first two months of the year was significantly higher than the previous quarter’s figure. Output was weak across the spectrum of economic sectors. However, the discrepancy between output and sales is being driven to a large extent by the automotive sector. While sales in this area picked up significantly of late, output again fell on the quarter. The German Association of the Automotive Industry’s figures for numbers of vehicles manufactured are already available for the entire first quarter. With March’s figure weak, the automotive sector looks set to post a somewhat more anaemic result for the quarter. Sentiment indicators paint a more favourable picture of industrial activity overall. For example, in the manufacturing sector, companies’ assessment of the current situation, export expectations and production plans, as captured by the ifo Institute, improved significantly on average in the first quarter. S&P Global’s Purchasing Managers’ Index for the first three months of the year was also well above the 50-point threshold that indicates growth. As things currently stand, the picture painted by the indicators suggests overall that industry made a positive contribution to the increase in GDP in the first quarter.

In terms of underlying trend, demand for industrial goods remained stable, but the outlook for industry has deteriorated. New orders in February were slightly higher than in January but, when averaged across both months, were still well below the previous quarter’s level. This is due to the volume of large orders normalising after having been very high in the previous quarter. 4 Domestic demand declined considerably in February. The exceptionally strong rise in (large) orders seen in the previous quarter, especially for other transport equipment, receded markedly. Foreign demand also remained below the previous quarter’s level, despite increasing in February. This was mainly due to weaker orders from the euro area. If we disregard volatile large orders, the picture is a more stable one: new orders rose significantly in February compared with the previous month. On an average of January and February, they were only slightly down on the quarter before. February’s growth in new orders was driven by all regions, but especially by orders from abroad. Overall, the underlying trend in foreign demand thus remains on a slight upward trajectory. However, ifo-surveyed export and business expectations declined significantly in March as the war in the Middle East progressed, suggesting that the outlook has become gloomier. This is likely due not only to the burden of higher energy costs and supply chain disruption, but also to fears that global demand will be weakened by the conflict in the Middle East. 

Private consumption was significantly muted as the year began. Whilst it provided a marked boost to growth at the end of 2025, the current indicators now point to a decline. In February, real retail sales were once again down on the month and, averaged across January and February, they fell short of the previous quarter overall. While data from the German Association of the Automotive Industry (VDA) show that new private car registrations rose markedly in March, the average for the quarter remained well below the figure for the final quarter of last year. Demand for electric cars, which the VDA’s March press release says is on the rise, cannot yet be treated as linked to the surge in fuel prices. 5 According to data available up to February, price-adjusted sales in the hospitality sector likewise fell significantly on the quarter. In addition, the assessment of the business situation by retailers and consumer-related service providers as captured by the ifo Institute worsened significantly in the quarter just gone. In most other branches, meanwhile, it improved. Consumers’ reticence could be partly down to the continued weakening of the labour market as well as the state of wage growth, which – while still strong – is slackening. Furthermore, the significant rise in fuel prices due to the war in the Middle East weighed heavily on households’ purchasing power in March. Overall, consumer prices rose by almost 1 % compared with February, and households’ real disposable income is likely to have contracted to a similar extent. In keeping with that, the GfK consumer survey deteriorated significantly in March: price expectations climbed markedly, while both economic and income expectations dimmed. As things stand now, these strains are set to hold private consumption back considerably in the current quarter as well.

The slight decline in employment that has been ongoing for the past nine months continued in the first two months of the new year. In February, total employment in Germany continued to decline slowly on the month after seasonal adjustment, falling by 12,000 to 45.90 million persons. Employment subject to social security contributions actually fell by significantly more in January 2026; this first estimate is relatively volatile. The number of jobs in manufacturing continued to fall considerably, for example. Headcount also declined notably in temporary agency work, which has been shrinking massively for three years already, as well as in trade and in the logistics sector. In construction, the small decline is likely due mainly to weather conditions. This was only offset by an increase in employment in healthcare and social services, as well as in energy and water supply. The use of short-time work for economic reasons is declining but does not signal an improvement in labour market conditions, either. It is an instrument used to alleviate a short-term cyclical shortfall in demand. It does not help with the structural problems that German industry is facing first and foremost. In addition, the number of self-employed persons fell, as did the number of those in exclusively low-paid part-time work.

Although the war in the Middle East is unlikely to have had much of an impact on firms’ employment plans so far, the latest leading indicators show no signs of a labour market recovery in the coming months either. The ifo employment barometer remains deep in negative territory despite a minimal improvement in the overall indicator of late. The indicator maps the recruitment plans of trade and industry over the next three months. By contrast, the IAB labour market barometer also takes into account publicly financed sectors. After a slight deterioration, it is now only marginally above the neutral threshold. In macroeconomic terms, this means that the employment level is broadly stable. The number of job vacancies reported to the Federal Employment Agency rose perceptibly at the beginning of the year. However, this is largely attributable to one employer reporting jobs in the area of defence, justice and judicial activities, and public order and safety activities. This is therefore not a signal that demand for labour is picking up across the economy. 

Unemployment remained unchanged at an elevated level in March. The number of persons officially registered as unemployed was 2.98 million in February in seasonally adjusted terms. The unemployment rate remained unchanged at 6.3 %. Unemployment in the statutory unemployment insurance scheme, which is closely linked to cyclical developments, continued to rise over the period under review. However, unemployment among those receiving the basic welfare allowance fell by a similar amount. Total underemployment also remained unchanged, suggesting a constant level of labour market policy measures. According to the IAB unemployment barometer, unemployment is likely to rise somewhat over the next few months on balance.   

Oil prices continued to rise in April, amid heightened volatility. This was a reflection of the tense geopolitical situation in the Middle East. Although a temporary ceasefire was agreed at the beginning of April, subsequent negotiations failed to produce any noteworthy results. As a consequence, the situation in the energy markets did not ease to any noticeable degree. The route through the Strait of Hormuz, which is key to global trade in oil and liquefied natural gas, remained blocked. Against this backdrop, the price of crude oil fluctuated at a sharply elevated level in April. As this report went to press, a barrel of Brent crude oil cost US$103, which is 46 % more than when the current conflict began. Natural gas prices slipped somewhat compared with March, to €41 per megawatt hour; nonetheless, they remain around 28 % higher than they were before the conflict.

In domestic sales, industrial producer prices rose noticeably in March as compared to February after seasonal adjustment. This was largely driven by higher energy prices. However, even without taking the energy component into account, there was a moderate increase. Industrial producer prices remained virtually unchanged on the year (−⁠ 0.2 %). Seasonally adjusted import prices stagnated in February, the last month for which data are available. In other words, they relate to the period before the outbreak of the war in the Middle East. Whilst import prices excluding energy fell marginally on the month, energy prices were up slightly. Import prices fell by 2.3 % on the year. 

Consumer prices rose substantially in March owing to the war in the Middle East. The Harmonised Index of Consumer Prices (HICP) rose by 0.9 % on the month in seasonally adjusted terms, compared with 0.2 % in February. The significant increase in March is mainly attributable to markedly higher energy prices, especially for fuel and heating oil. This reflects the immediate impact of the increase in crude oil prices in the wake of the conflict in the Middle East. Prices for diesel and heating oil have risen even more sharply than the increase in crude oil prices alone would suggest. Food prices also picked up again somewhat in March, after having stagnated in the previous month. This was partly because of steep increases in the price of tobacco products. Prices for services continued to appreciate, mainly driven by travel-related services. Prices for non-energy industrial goods likewise rose moderately. Annual headline inflation increased sharply from 2.0 % in February to 2.8 % in March, driven by higher energy prices. 6 By contrast, the core rate (excluding energy and food) remained unchanged at 2.5 %.

Inflation is likely to remain significantly elevated over the coming months. However, the duration and extent of the surge in inflation depend heavily on further developments in the Middle East conflict. The sharp rise in crude oil prices had an immediate impact at the consumer level. There is, however, likely to be a delay before households feel the impact of the higher wholesale prices for gas and electricity. This is because gas and electricity suppliers have long-term sourcing strategies. In addition, supply agreements with household customers usually guarantee fixed prices for a certain period of time. This means that there is a delay before short-term fluctuations in wholesale market prices are passed through to end customers. Higher energy commodity prices are expected to increasingly impact other components of the HICP basket, too, over the next few months. The main mechanism for this is through rising production and transport costs and the rise in the price of energy-intensive inputs, such as fertiliser. These indirect effects mainly impact consumer prices for food and non-energy industrial goods, but also energy-intensive services such as air travel. However, any estimate of the size of the indirect effects is, like estimates of the direct effects, associated with considerable uncertainty. The extent of the impact depends materially on how long and by how much energy prices rise. Second-round effects are also possible, for example if the initial price shock is reflected in wage setting and subsequently in price setting. However, experience has shown that such effects tend to occur with a relatively large lag. The temporary lowering of the energy tax on petrol and diesel the German government is considering is likely to shave roughly ¼ percentage point off the inflation rate over the two months during which it would apply. 

Germany’s government debt expanded by €144 billion to €2.8 trillion in 2025. 7  Central government debt saw the sharpest increase, with a rise of €107 billion. 8 The debt of state governments and local governments grew by €19 billion and €25 billion, respectively. The social security funds saw their debt rise from €3 billion to €7 billion. This debt is predominantly intra-government borrowing from central government.

Germany’s general government debt ratio grew by 1.3 percentage points in 2025, reaching 63.5 %. Taken in isolation, the rise in nominal GDP (in the denominator) lowered the debt ratio by 2.0 percentage points. Excluding this effect, the additional debt would have raised the debt ratio by 3.3 percentage points. 

The €144 billion rise in debt was larger than the general government Maastricht deficit (€119 billion). This is because part of the debt was used to acquire financial assets, which does not increase the deficit.

For some years now, the EU has been increasingly taking out joint debt in the capital market. In 2025, this joint EU debt increased further. This was mainly due to borrowing for the Next Generation EU (NGEU) programme and for further assistance loans to Ukraine. 

For a comprehensive analysis of national government finances, this joint European debt needs to be considered on top of the national Maastricht debt. This is because, as things currently stand, the Member States will have to service a large part of this debt through higher contributions to the EU budget. At present, EU contributions are broadly based on the economic weight of the Member States, i.e. their share in EU gross national income (EU GNI). The Bundesbank therefore accounts for joint debt in the amount of Germany’s share in EU GNI. This share corresponds to Germany’s expected future financial contribution to the EU budget. 9

The Bundesbank includes a portion of EU debt in assessments of Germany’s government finances. This only includes the “consolidated” debt of the EU institutions. 10 In other words, it encompasses all debt taken out by the EU minus the EU’s claims on the Member States. The consolidated debt level of the EU thus mainly reflects NGEU grants and loans to non-EU countries (macro-financial assistance). By contrast, EU debt that finances loans to EU Member States is not included. This includes NGEU loans or loans provided by the European Stability Mechanism (ESM). These loans increase the national debt level of the borrowing countries, which also pay interest and principal to the EU or the ESM. In turn, these inflows are then used by the EU level to pay interest and principal on its own corresponding debt.

At the end of 2025, consolidated EU debt stood at an estimated €386 billion, or just under 2.1 % of EU gross domestic product (EU GDP; see Chart 1.5). 11 This includes €297 billion in loans for NGEU grants, €76 billion in macro-financial assistance and €82 billion in loans for NGEU payments that have not yet been disbursed. A residual item estimated at €69 billion was deducted. 12  

Germany’s share in consolidated EU debt thus came to €95 billion in 2025, or 2.1 % of German GDP (see Chart 1.6). 13 Expanded in this way, Germany’s debt ratio stood at 65.6 %. This allocation is based on Germany’s current share in EU GNI, which is 25 %. As EU debt attributable to Germany rose on the year, Germany’s expanded debt ratio rose more strongly than the national metric.

The consolidated EU debt attributable to Germany is likely to rise significantly in 2026 and 2027, too. It could reach around €150 billion in 2027, or approximately 3 % of Germany’s GDP. 

Local governments (core budgets and off-budget entities) closed 2025 with a very large deficit. 15  At €32 billion, it was €7 billion above the prior-year figure.

Revenue rose by 4 % on the year (+⁠ €15 billion). Tax revenue grew by 3½ % (+⁠ €4½ billion). Of this, revenue from local government’s share in income tax rose particularly sharply, by 7½ %. Meanwhile, local business tax, which is a major revenue item, increased by only 1 %. Revenue from real estate tax barely changed. It is likely that the previous reform has primarily shifted the distribution of the tax burden between individual taxpayers. As things stand, local governments have so far hardly used the new real estate tax C, which is intended to make undeveloped building land more expensive. Transfers and refunds received by local governments from state governments grew by 4 % (+⁠ €6½ billion). The stagnation in investment transfers had a dampening effect here. Revenue from fees rose by 5 % (+⁠ €2½ billion). Unlike in the previous two years, developments appear to have been hardly affected by further units being assigned to the local government level in statistical terms. This applies to both growth in revenue and in expenditure. 16  

Spending grew by 5½ % (+⁠ €22 billion). Personnel expenditure rose at an above average rate of 7 %. This is likely to have been due mainly to higher negotiated wages and social contribution rates as well as civil servants’ pay. Social spending also saw dynamic growth of 6 %. This was primarily because of higher expenditure on integration assistance as well as on child and youth welfare services. Expenditure on accommodation payments in connection with the citizen's benefit almost stagnated, and expenditure on asylum seekers’ benefits fell significantly. Other operating expenditure rose by 4 %. Interest expenditure increased sharply by 14 % (+⁠ €½ billion), but remained limited to 1 % of total expenditure. Fixed asset formation grew by 3½ % to €54 billion. In 5 of the 13 non-city states, it fell or stagnated. It is unclear to what extent the prospect of money from the Infrastructure and Climate Neutrality Fund has influenced fixed asset formation.

Local government debt rose considerably last year, by €27 billion to €196 billion. 17 This was also true, not least, of cash advances, which points to considerable fiscal tightness. They increased by €7 billion to €39 billion. Under budgetary rules, they are actually only allowed to be used to bridge liquidity bottlenecks. At the end of a fiscal year, only fairly small residual holdings should be left. Cash advances continued to be concentrated strongly among local governments in North Rhine-Westphalia (€25 billion, or almost €1,400 per capita). The per capita increase was also strongest there (+⁠ €180 per capita), closely followed by the local governments of Rhineland-Palatinate (+⁠ €170). Saarland’s local governments recorded a marked decline (−⁠ €140 per capita). Here, the “Saarlandpakt” fund for partial debt relief via the federal state still appears to have had an effect. In addition, the state made higher payments under the local government financial equalisation scheme. However, local governments’ total debt rose slightly from an already high level.

Local government finances will remain under pressure this year, too. The deficit could fall as a result of the temporary grants from the Infrastructure and Climate Neutrality Fund. These are likely to be disbursed on a fairly extensive scale as early as 2026 and are not tied to evidence of rising investment expenditure. In addition, state governments could respond to the ongoing fiscal tightness experienced by their local governments with higher grants from state government funds. There are no signs of any major relief on the expenditure side.

Ultimately, central government also finances investment by state and local governments via loans from the Infrastructure and Climate Neutrality Fund. 18  For this purpose, the federal states will receive a total of €100 billion from the special fund. It seems they intend to pass on just over half of this amount to their local governments for their investment. Funds for investment measures can be approved up to the end of 2036. The measures must then be complete by the end of 2042. There is no annual limit on drawdowns. The funds are primarily allocated to the individual federal states based on their tax potential according to the state government financial equalisation scheme. 

Local governments can use the money they receive from the special fund in a variety of ways, and do not have to increase their investment compared with 2024. In addition to areas closely connected to infrastructure, such as transport routes and schools, the funds can also be used for sports facilities and housing construction, for example. Although the special fund is intended to finance additional investment, the federal states opposed the introduction of a formal criterion for assessing additionality for their part of the funds. In line with this, they are now not setting specific guidelines for their local governments, either. Many local governments could therefore use these resources to finance investments that would otherwise have been drawn from their own budgets or postponed in view of budget deficits. The resources from the special fund could thus help to stabilise local government investment. A stronger increase compared with 2024 is not expected, however.

As early as this year, there could be quite extensive outflows from the special fund to local governments. Most of the funds are available globally for investment projects from 2025 onwards (especially in Baden-Württemberg and Hesse).  As a result, local governments will already be able to draw on funds relatively quickly and extensively in 2026. However, some of the funds will also be passed on by state governments via state-specific funding programmes. This could lead to noticeably slower outflows of funds.

To achieve actual improvements in infrastructure, it would be advisable for local governments to use the money from the special fund to increase their investment. A number of studies indicate that local governments have considerable investment needs. 19 Higher investment is therefore advisable even without a legal commitment concerning the grants from the Infrastructure and Climate Neutrality Fund and despite the need for budget consolidation. New decisions and projects to simplify and speed up administration and procedures, particularly through bureaucracy reduction, digitalisation and more efficient federal structures, are also adding momentum to infrastructure development and, at the same time, to improved overall efficiency in government services.  However, the progress made in digitalisation and harmonisation projects has often been sluggish so far. 20

If local governments use central government funds to close structural gaps in their budgets, they will merely be putting off the action that needs to be taken. This is because doing so will not lessen the need to catch up on infrastructure investment, and the resources from the special fund are finite. Moreover, this will only prolong the current extensive need for consolidation. The federal states are the main parties responsible for preventing this through budgetary surveillance. The renewed significant rise in local government cash advances is not consistent with effective surveillance. In order to increase vigilance in surveillance and prevent a resurgence in cash advances, it could be stipulated that local governments may only take out multi-year cash advances from their federal state. It would also make sense to require state governments to count such loans towards their own credit limits under their debt brakes. 21  

This article is based on data available up to 16 April 2026, 11:00.

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De Nederlandsche Bank (2025), What is the Dutch share of EU debt?, 10 November 2025.

Deutsche Bundesbank (2026a), Commentaries: Economic conditions and Public finances, Monthly Report, March 2026.

Deutsche Bundesbank (2026b), January results of the Bank Lending Survey in Germany , press release of 3 February 2026.

Deutsche Bundesbank (2026c), German general government debt up in 2025 by €144 billion to €2.8 trillion; debt ratio up from 62.2 % to 63.5 % , press release of 31 March 2026.

Deutsche Bundesbank (2026d), Government investment: gear new scope for borrowing towards infractructure, Monthly Report, January 2026.

Deutsche Bundesbank (2025a), Commentaries: Economic conditions and Public finances, Monthly Report, April 2025.

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