Germany’s economy surprised observers by expanding 0.3% in the first quarter of 2026, continuing a faster-than-expected recovery despite geopolitical shocks that have pushed up energy costs. Data from the Federal Statistics Office showed quarter-on-quarter growth driven by higher private and government spending and rising exports. Year-on-year GDP rose 0.5% in price-adjusted terms.
The figures cover January through March, a period that included the outbreak of the US-Israeli war with Iran on February 28 and Iran’s closure of the Strait of Hormuz, which contributed to higher fuel prices. Higher costs at the pumps and weakening business sentiment — with a key business index falling sharply in April — have nonetheless weighed on consumption and investment, and economists have downgraded forecasts for the year.
Corporate results reflect the broader strain. Volkswagen reported a 28.4% drop in net profit to €1.56 billion in the first quarter, with revenue down 2.5% to €75.7 billion and deliveries falling 4% to 2.05 million vehicles. The group cited wars, geopolitical tensions, trade barriers and intense competition as headwinds. Volkswagen said rising tariffs were adding roughly €4 billion annually in costs and signaled deeper cost-cutting and business model changes, including plans to cut some 50,000 jobs in Germany by 2030.
Labour market data remains problematic. Unemployment in April remained above three million at 3.008 million, up 20,000 seasonally adjusted. The Federal Employment Agency said a new government forecast pointing to a higher average number of unemployed people for the year will push spending on benefits up and widen the agency’s deficit. Agency chief Andrea Nahles said exhausted reserves mean the shortfall must be fully covered by federal loans. The Institute for Employment Research described employment prospects as the bleakest since the COVID-19 pandemic.
Political and policy developments are unfolding alongside the economic news. Chancellor Friedrich Merz urged Iran to come to the negotiating table, warned of the economic consequences of a blocked Strait of Hormuz and said Germany stands ready, under the right conditions, to contribute militarily to guarantee freedom of maritime routes. Merz has sought to rally EU sanctions pressure on Iran and framed his comments as part of a collective transatlantic effort with allies, particularly the United States.
Merz has been carrying out damage limitation after remarks suggesting the US had been “humiliated” by Iran provoked a sharp response from President Donald Trump, who in social media posts raised the possibility of reducing US forces in Germany. The prospect of troop cuts has added diplomatic strain to transatlantic ties.
Domestically, the coalition government agreed to reform heating law rules, splitting key heating costs between landlords and tenants. The revision scales back parts of the previous law that required new heating systems to run on at least 65% renewables. Under the new plan, gas and oil systems can still be installed but must progressively use more climate-friendly fuels from 2029, and landlords who choose fossil-fuel systems for replacements in existing buildings will be required to cover half of network charges, the carbon price and biofuel costs.
Press freedom watchdog Reporters Without Borders moved Germany down three places to 14th in its global index, citing rising threats to journalists online and on the streets, tougher working conditions and intense public scrutiny when reporting on polarizing issues including conflicts in the Middle East. RSF described global press freedom as at a 25-year low.
Legal and local stories also made headlines. A Berlin administrative court ruled that Culture and Media Commissioner Wolfram Weimer may not label a local bookstore “extremist,” finding the claim violated personal rights and lacked a factual basis. Police in Hanau investigated the discovery of a floating wooden coffin in the Main River; officers recovered and opened the coffin, finding it empty but lined in white silk and marked with the day’s date.
As Germany navigates higher energy costs, troubled corporate earnings and a strained labour market, government reforms and diplomatic manoeuvring underscore the challenges facing Europe’s largest economy in a turbulent global environment.