Germany’s economy grew 0.3% in the first quarter of 2026, surprising analysts and continuing a faster-than-expected recovery despite geopolitical shocks that have pushed up energy costs. Federal Statistics Office data showed quarter-on-quarter growth driven by higher private and government spending and rising exports; year-on-year GDP in volume terms rose 0.5%.
The January–March figures cover the outbreak of the US-Israeli war with Iran on February 28 and Iran’s closure of the Strait of Hormuz, events that helped lift fuel prices. Higher pump prices and weakening business sentiment — with a key business index plunging in April — have nonetheless weighed on consumption and investment, prompting economists to downgrade growth forecasts for the year.
Corporate results reflect those strains. Volkswagen reported a 28.4% drop in net profit to €1.56 billion in Q1, with revenue down 2.5% to €75.7 billion and deliveries falling 4% to 2.05 million vehicles. The group pointed to wars, geopolitical tensions, trade barriers and intense competition as headwinds, saying rising tariffs add roughly €4 billion in costs annually. Volkswagen signalled deeper cost-cutting and business-model changes, including plans to cut about 50,000 jobs in Germany by 2030.
The labour market remains weak. Unemployment in April stayed above three million at 3.008 million, up 20,000 seasonally adjusted. The Federal Employment Agency warned that a new government forecast of a higher annual average unemployed count will raise benefit spending and widen the agency’s deficit; chief Andrea Nahles said exhausted reserves mean the shortfall must be covered fully by federal loans. The Institute for Employment Research called employment prospects the bleakest since the COVID-19 pandemic.
Political and policy developments have accompanied the economic news. Chancellor Friedrich Merz urged Iran to return to negotiations, warned of the economic fallout from a blocked Strait of Hormuz and said Germany stands ready, under appropriate conditions, to help guarantee freedom of maritime routes, including militarily. He has pushed for stronger EU sanctions on Iran and framed his stance as part of a transatlantic effort with allies, notably the United States.
Merz has also engaged in damage limitation after suggesting the US had been ‘humiliated’ by Iran, a remark that drew a sharp response from President Donald Trump, who on social media raised the prospect of reducing US forces in Germany. The possibility of troop cuts has added diplomatic strain to transatlantic ties.
Domestically, the coalition agreed to scale back parts of the heating law, splitting key heating costs between landlords and tenants. New rules lessen the previous requirement that new heating systems run on at least 65% renewables; gas and oil systems can still be installed but must progressively use more climate-friendly fuels from 2029. Landlords who opt for fossil-fuel 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 in public, tougher working conditions and intense scrutiny when reporting polarising issues such as Middle East conflicts. RSF said global press freedom is at a 25-year low.
A few local legal and police stories attracted attention: 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 factual basis. In Hanau police recovered a floating wooden coffin from the Main River; it was opened and found empty but lined in white silk and marked with the day’s date.
As Germany contends with higher energy costs, softer corporate earnings and a strained labour market, policy shifts and diplomatic manoeuvres underline the challenges facing Europe’s largest economy amid a turbulent international environment.