Germany's industrial production has increased for a second month running, providing further evidence that Europe's largest economy is gradually overcoming the drag from the conflict in Iran. Data released on Tuesday by the Federal Statistical Office showed that industrial output rose by 0.9% month-on-month in May, significantly surpassing the median forecast of 0.1% from economists surveyed. The primary driver of this growth was the automotive sector, where output surged by 3.6%, while the construction industry also expanded. This follows data released on Monday indicating an increase in factory orders for May, which likely reflects Germany's increased investment in its armed forces, with orders for transport equipment, including military, seeing a substantial rise.

Resilient Recovery Amid Multiple Headwinds

This stronger-than-expected industrial performance comes at a time when the German economy faces several challenges. Since the outbreak of the US-Iran conflict, the sustained closure of the Strait of Hormuz has led to a sharp increase in oil and gas prices, significantly pressuring production costs for German firms. The German government's spring economic forecast, released in April, had already slashed its 2026 growth expectation from 1.0% to 0.5%. The European Commission subsequently also halved its growth forecast to 0.6%. However, the data has shown unexpected resilience. Analysts at ING noted that despite the ongoing Middle East conflict and high energy prices, German industrial output has demonstrated remarkable resilience—with production in the first two months of the second quarter not falling but rising. Some sectors have even benefited from the Middle East tensions, as Asian competitors have been more severely impacted by the Strait of Hormuz closure, allowing German companies to capture some transferred orders.

Recovery Outlook: Signs of Hope Persist Alongside Challenges

Economist Michael Herzum from Union Investment stated, "The prospects for a gradual recovery in the coming months have improved. Geopolitical uncertainty surrounding the Iran conflict has eased somewhat, energy prices have stabilized, the global economy remains resilient, and the government's higher spending on infrastructure and defense is expected to increasingly feed through to the real economy."

However, headwinds remain significant. Senior economist Marco Wagner at Commerzbank pointed out that the Iran conflict remains a major uncertainty, with peace far from achieved. Furthermore, heatwaves and drought in Europe have lowered water levels on key shipping routes, potentially causing new supply chain disruptions. Data from the Federal Statistical Office showed that industrial output had unexpectedly fallen by 0.7% month-on-month in March, highlighting the uneven path of recovery.

In the first quarter of 2026, Germany's Gross Domestic Product grew by 0.3%. Large-scale public infrastructure and defense spending are expected to provide a further boost to economic performance in subsequent periods. However, the rise in energy prices following the outbreak of the Iran war continues to pressure consumers and businesses. The coalition government, which has vowed to break Germany's years of economic stagnation, announced a series of reform proposals last week targeting the pension system, income tax, and sick leave rules.