German economy sees 'loss of momentum' over Iran war, low water levels

The German economy has suffered "temporary loss of momentum" in the third quarter due to low water levels on the Rhine and high energy prices, but growth is expected to pick up pace towards the end of the year, the country's central bank said on Monday.

After years of recession and minimal growth, Europe's largest economy ground into gear over the first half of 2026, with gross domestic product (GDP) advancing by 0.4% and 0.3% respectively in the first two quarters.

Chancellor Friedrich Merz's government has loosened fiscal policy to invest record sums in defence and infrastructure, creating "additional impetus" for the economy, the Bundesbank said in its monthly report for September.

However, the war in Iran and a summer of drought have slowed activity, with the Bundesbank warning that the economy "will grow only slightly in seasonally adjusted terms" in the third quarter. 

Low water levels, especially on the Rhine, have hampered industrial production, while private consumption is expected to remain subdued partly due to decreasing purchasing power linked to high inflation. 

Following the expiry of the government's fuel tax subsidy at the end of June, the inflation rate climbed again, reaching 2.9% in August.

Nevertheless, the central bank believes that the "German economy will not stray from its path to recovery" in the medium term, arguing that it has "remained fairly resilient to elevated energy prices and supply chain problems."

"Growth in the German economy is likely to pick up again in the fourth quarter," the Bundesbank wrote. "However, this will also depend on how the conflict in the Middle East evolves and how quickly normal water levels are restored on major waterways."