German Economy Defies Middle East War In First Quarter

Carsten Brzeski

Chief Economist at ING Germany • May 22, 2026 at 6:15 AM EDT

Germany's economy grew by 0.3% in Q1, driven by robust exports and public spending despite geopolitical tensions.

depositphotos_133983724-stock-photo-business-team-working-in-creative.jpg — Source: DepositPhotos

Despite the war in the Middle East, the German economy had its best performance since the first quarter of 2025. The just-released GDP details, however, do not bode well for growth in the second quarter.

A strong start to the year has been confirmed. The German statistical office just confirmed that the economy grew by 0.3% quarter-on-quarter in the first three months of the year, defying the adverse impact of the war in the Middle East, at least for now. According to the statistical office, growth was driven by public consumption and exports. At the same time, private investments and activity in the construction sector disappointed. Private consumption remained unchanged on the quarter.

Inventory reductions weighed significantly on economic activity, shaving off 0.9 percentage points of quarterly GDP growth. Net exports – very often the counterbalance to inventory changes – added 1.3 percentage points to quarterly GDP growth. These big swings normally call for some caution.

Looking ahead, the growth composition combined with the obvious fallout from the war in the Middle East, new uncertainty and higher energy prices, does not bode well for the near-term outlook. It’s hard to see how net exports will be able to repeat the strong first-quarter performance. At the same time, anticipating potential supply chain frictions, companies are likely to hold on to higher inventory levels. With high energy prices, private consumption is also highly unlikely to recover, and higher interest rates will hamper activity in the construction sector. This leaves the public sector as the only possible source of growth in the second quarter. Not a very promising outlook.

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