German industry worsens as Middle East war takes its toll

German industrial production weakened further in March as the war in the Middle East started to take its toll. The just-released industrial data for March illustrate the struggle of German industry to gain momentum in the first quarter of the year. Not only was the February drop revised downwards, with a 0.7% month-on-month decline in March, but industrial production in the full first quarter was more than 1% weaker than in the final quarter of 2025.

The March drop was mainly driven by falling production in manufacturing. On a more positive note, activity in the construction sector rebounded somewhat in March. At the same time, export growth slowed to 0.5% MoM, from 4.7% in February. As imports surged once again, this time by more than 5% MoM, the trade surplus narrowed significantly, to the lowest level since November last year.

The German economy surprisingly showed a positive performance in the first quarter, growing by 0.3% quarter-on-quarter. Against this background, this morning’s industrial data is even more of a look in the rearview mirror than normal. Still, the fourth consecutive month without growth in industrial production provides at least two important insights into the German economy:

• As industrial production is down on the quarter and the trade surplus narrowed significantly in March, a downward revision to the first estimate of first-quarter GDP growth has become likely.
• It needs at least 1% growth in the second quarter to bring industrial production back into positive territory. A development that currently looks unlikely.

Looking ahead, not only has the outlook for German industry – and for the entire economy – worsened again, but the war in the Middle East and soaring energy prices have again exposed the fact that Germany is one of Europe’s largest net importers of energy. Some 6% of its oil imports stem from countries in the Middle East. The so-called energy-intensive industries in Germany account for some 17% of industrial gross value added and employ just under one million people. Even worse, the longer the blockade of the Strait of Hormuz lasts, the higher the risk that German industry could not only be hit by higher energy prices but also by new supply chain disruptions. And finally, don’t forget the latest US tariff threat. Some 25% tariffs on European automotives would clearly be another hit for an already battered industry.

This rather sombre outlook is confirmed by production expectations being at a 12-month low. At the same time, however, dropping inventories and increasing order books over the last few months should still provide a cushion against a too sharp drop in production. Still, some note of caution is needed, particularly when interpreting yesterday’s strong increase in industrial orders: while at first glance, it could be seen as a sign of strength, it could also simply be companies having learnt their lessons from 2020 and 2022, quickly trying to pile up new inventories in anticipation of new supply chain frictions.

All in all, this morning's industrial production data suggests that the stuttering of one of Germany's most important growth engines worsened with the start of the war in the Middle East. Given that energy prices continued to soar in April and risks of supply chain disruptions increased, any near-term improvement in industrial production looks very unlikely.