Bundesbank: Higher short-term inflation and months before GDP rise

Germany's economy, hampered by the Iran war, is expected to return to modest growth only in the autumn, the country's central bank or Bundesbank predicted on Thursday.

Overall, economic output is likely to edge up slightly by 0.1% in the third quarter of 2026 compared with the previous quarter after a summer lull, the Bundesbank forecasted in its June monthly report.

Bundesbank economists expect the strongest direct strains from the conflict in the Middle East to ease by then. On the assumption that energy prices fall again, private households would have more real income available, which could boost consumption.

However, Bundesbank experts also expect consumer prices to rise more strongly in the coming months. They forecast that the EU-harmonized inflation rate (HICP) in Europe's largest economy will climb above the 3% mark in the coming months. It stood at 2.7% in May.

"After the temporary fuel rebate expires, energy inflation is likely to be higher again at first. Looking at petrol, there is likely to be a lag before households feel the effects of higher wholesale prices. This is due to longer-term procurement and contract structures," the Bundesbank wrote.

Food could also become more expensive because producers pass higher energy costs on. The cut in the energy tax on petrol and diesel by just under 17 euro cents (19 US cents) per litre, in place since May 1, expires at the end of June.

Higher inflation rates reduce consumers' purchasing power, meaning they can buy less for €1. This slows private consumption, which is an important pillar of domestic demand.

Iran war affecting second quarter growth

For the current second quarter, the Bundesbank expects overall stagnation in gross domestic product (GDP). 

"The impact of the war in Iran will considerably stall the economic recovery which would otherwise be on the cards thanks mainly to the strong fiscal stimulus in the second and third quarters," it wrote.

In the first quarter, GDP had increased by 0.3% compared with the previous quarter, mainly due to higher exports. There had been strong hopes that Germany's economy would pick up again after three lean years, also because the state has launched massive multi-billion investments in roads, rail and defence.

In 2025, Germany narrowly avoided a third consecutive year without growth, posting a marginal increase of 0.2%.