German Industry Slumped in March on Outbreak of Iran War -- 3rd Update

By Ed Frankl

German industrial production retreated unexpectedly in March, as the start of the conflict in the Middle East sent energy prices climbing, a setback for any manufacturing recovery in Europe's largest economy this year.

Germany's industrial sector had been expected to rebound in 2026, after a downturn that stretches back into the last decade. Pandemic-era supply issues were exacerbated by the pivot away from cheap Russian gas, increased competition from China for German goods, and an expensive green-energy transition.

But the country's government last year pledged to unlock more than $1 trillion for defense and infrastructure--investments that it hoped would revitalize Germany's traditionally dominant manufacturing sector.

Rising oil-and-gas prices stemming from the war in Iran have darkened the outlook, and are especially damaging to a key energy importer like Germany.

Output fell 0.7% in March, driven by a slump in energy production, and accelerating a 0.5% decline in February, Germany's statistics agency Destatis said Friday. A consensus of economists polled by The Wall Street Journal expected a 0.5% rise in March. On year, production was down 2.8%, the data showed.

As a result of the war, German industry faces stagnation at best this year, the country's BDI industrial association said last month, with the conflict creating additional uncertainty and strain for companies.

Car sales in Germany slowed significantly in April, the KBA motor authority said Thursday. Meanwhile, Volkswagen's head of procurement Karsten Schnake said in an interview with German trade publication Automobilwoche, also on Thursday, that the automaker might have to raise prices should the war drag on beyond the middle of the year. President Trump's threatened tariffs of 25% for European car imports into the U.S. present another headache for carmakers.

"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," Carsten Brzeski, global head of macro at ING bank, said in a note to clients.

With production down 1.2% on quarter and Germany's trade surplus narrowing significantly in March, gross domestic product could be downgraded from the 0.3% growth recorded in January-March, he added.

Imports jumped 5.1% in March, separate Destatis data showed Friday, to their highest value since November 2022, when Germany was paying increasing prices for energy imports after switching off the Russian gas spigot. Import prices climbed 3.6% on month, likely a result of the early impact of higher energy prices due to the war.

Indeed, the longer the Strait of Hormuz remains closed, the costlier it will be for the German economy as a whole. The waterway is a key choke point for inputs like industrial gases and fertilizer. Last month, the German government halved its growth forecast to 0.5% for this year.

As higher energy prices feed into inflation, the European Central Bank is expected to raise interest rates between two and three times this year, perhaps as soon as next month, according to LSEG data, likely making borrowing more expensive for industrial firms.

Purchasing managers data for April also showed slower output and orders in the manufacturing sector, as input prices increased at their fastest rate in three-and-a-half years. Business expectations turned negative for the first time in 18 months, S&P Global said.

Rare positive news came via factory orders, which climbed more than expected in March, Destatis said in separate data Thursday. However, as orders feed into production data with a lag, some of that might have been front-running of stocks to get ahead of supply-chain disruption prompted by the closure of the strait.

Write to Ed Frankl at [e-mail]

(END) Dow Jones Newswires

05-08-26 0438ET