German industry production disappoints even before Iran war

[BERLIN] German industrial production unexpectedly fell in February, casting doubt on a swift recovery in Europe’s largest economy – even before the Iran war started.

Output dropped 0.3 per cent from January, with construction and consumer goods driving the decline.

Only three economists in a Bloomberg survey had predicted a contraction. 

A separate report showed that exports rose 3.6 per cent in February and imports increased by 4.7 per cent – both exceeding economists’ estimates by far. 

The figures offer little reassurance that Europe’s largest economy will deliver on expectations of a meaningful rebound.

While a ceasefire in the Middle East is feeding hope that a further escalation of the crisis can be avoided, higher energy costs and uncertainty about longer-term solutions weigh on confidence and prospects for growth.

Germany’s leading research institutes forecast an expansion of just 0.6 per cent in 2026, they said. This is less than half the pace expected just a few months ago.

The Economy Ministry said: “Recent surveys point to a slowdown in industrial activity in the second quarter amid heightened geopolitical uncertainty.

“Future economic developments will therefore depend crucially on how the conflict in the Middle East unfolds.”

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Chemical makers, including BASF and Lanxess, were among the first to warn about the implications of the war that kept a key route for oil and petrol shipments – the Strait of Hormuz – closed for more than five weeks.

Lufthansa flagged potential bottlenecks for jet fuel availability and readied plans that could involve grounding planes.

Martin Ademmer, a Bloomberg economist, said: “Before the Iran war, we expected a modest upturn in the first half of the year, with higher government spending adding momentum in the second.

“Now, higher oil and gas prices are likely to weigh on energy-intensive sectors and indirectly affect cars and machinery manufacturing, derailing the industrial recovery.”

Whether that will still be necessary will depend largely on the two-week truce, agreed by the US and Iran, holding and ultimately evolving into a more lasting peace.

German Chancellor Friedrich Merz welcomed the agreement on Tuesday (Apr 7), encouraged negotiations to prevent a “severe global energy crisis”, and said the country is prepared to contribute to guaranteeing free passage through the strait. 

Measuring economic sentiment, a gauge published on Tuesday highlighted the stakes.

A Sentix index for Germany plunged in April, with expectations now at the lowest level in 1½ years.

Some confidence still rests on an expansionary fiscal policy, with infrastructure and defence spending expected to bolster demand.

In February, factory orders posted a weaker-than-anticipated 0.9 per cent gain. BLOOMBERG