Germany’s Economy Stumbles in January as Exports Fall 2.3% and Factory Output Drops for Second Month

Germany Was Supposed to Be Recovering. These Numbers Say Otherwise.

Germany’s fragile economic recovery has been thrown into serious doubt after new data revealed a sharp deterioration in exports and industrial output at the start of 2026 — and none of it yet reflects the full economic damage from the Iran war’s energy price shock.

Exports fell 2.3 per cent in January on a monthly basis, while imports collapsed 5.9 per cent — both larger than economists had forecast. A day earlier, Germany’s statistical office confirmed that manufacturing output fell for the second consecutive month, deepening concerns about the resilience of Europe’s largest economy heading into a turbulent year.

“The entire German economy had a very weak start to the new year,” said Carsten Brzeski, ING’s global head of macro. “Our optimism about Germany’s growth prospects has taken a hit.”

Squeezed From Both Sides

Germany’s industrial sector — historically the backbone of its prosperity — is being hit simultaneously from two directions. On one side, US tariffs have eroded export competitiveness and dampened demand from one of Germany’s most important trading partners. On the other, Chinese manufacturers are undercutting German rivals across automotive, machinery, and industrial equipment markets at a pace that is proving difficult to match.

The result is a manufacturing sector that is contracting rather than stabilising. Order intake plunged 11 per cent in January, driven largely by a drop in volatile large-ticket orders. Goldman Sachs economists described the industrial decline as “very broad-based,” suggesting the weakness is structural rather than the result of a few one-off disruptions.

For an economy that built its post-war identity on the strength of its Mittelstand — the dense network of mid-sized industrial exporters that powered decades of growth — the sustained loss of competitiveness represents something deeper than a cyclical slowdown.

The Import Puzzle

The steep fall in imports sent a mixed signal to economists. On one reading, it points to underlying weakness in domestic demand — German consumers and businesses buying less, investing less, expecting less. On another, it delivered a mechanical boost to the trade balance: Germany’s surplus jumped 21 per cent to €21bn in January.

“A fall in imports poses an upside risk to headline GDP growth this year,” wrote Claus Vistesen, chief Eurozone economist at Pantheon Macroeconomics — though economists were quick to note that a surplus built on import collapse is not the kind of growth anyone should welcome. It reflects retrenchment, not strength.

The European Central Bank is watching closely. With inflation dynamics in the eurozone already complicated by energy price volatility, a German demand slump creates a difficult policy environment — too much weakness to tighten, too much price pressure to ease aggressively.

The Iran War Factor — Not Yet Counted

Perhaps most concerning is what the January data does not yet show. The surge in global oil and gas prices triggered by the Iran war — which has disrupted approximately 20 per cent of global oil supply through the Strait of Hormuz — had not yet fully fed through into German industrial and energy costs by the time January’s figures were compiled.

Germany is particularly exposed. As a major industrial economy with limited domestic energy resources, it relies heavily on imported energy for manufacturing. The country spent much of 2022 and 2023 managing the aftershocks of the Russia-Ukraine war’s energy disruption. A second major supply shock, arriving before the first has fully healed, raises serious questions about whether European industry can absorb the pressure.

The G7 is currently considering an emergency release of strategic oil reserves to stabilise markets — but even if that mechanism is triggered, economists warn it would provide temporary relief rather than a structural fix.

Merz’s Moment of Reckoning

The data arrives at a politically sensitive moment for Chancellor Friedrich Merz, who came to office promising to jolt Germany out of its prolonged stagnation with a multibillion-euro investment package. The plan — widely welcomed by markets and business leaders — was supposed to provide the fiscal stimulus that Germany had deliberately withheld for years under the debt brake regime.

The country’s GDP expanded just 0.2 per cent in 2025, its first growth since 2022 after back-to-back years of contraction. The expectation had been that 2026 would represent a genuine inflection point. Tuesday’s data makes that scenario meaningfully harder to achieve.

Whether Merz’s investment programme can offset deteriorating export performance, weak industrial orders, and an incoming energy price shock — all simultaneously — will define not just his chancellorship, but Germany’s economic standing within Europe for years to come.

For now, the numbers are telling a story that Berlin would rather not hear.

For more on the global economic fallout from the Iran war, read our analysis of how oil markets are responding to the crisis and what the G7’s emergency options look like.