German economy grows 0.3% in Q1 despite Iran-war headwinds as VW profit slumps and ECB holds rates

German GDP expanded 0.3% in the first quarter of 2026 according to the Federal Statistical Office, a faster recovery than economists had forecast, with growth driven by higher private and government spending and rising exports. Year-on-year, GDP rose 0.5% in price-adjusted terms and 0.3% adjusting for seasonal factors. The data covers January to March, before the gas-price surge from the US-Israeli war on Iran fully fed through.

The expansion landed alongside a sharp profit warning from Volkswagen, which reported net profit fell 28.4% to €1.56 billion ($1.82 billion) in the first quarter, with revenue down 2.5% to €75.7 billion. CEO Oliver Blume blamed 'wars, geopolitical tensions, trade barriers, stricter regulations, and fierce competition.' Deliveries fell 4% to 2.05 million vehicles, with declines in China and the US outweighing European gains. Finance chief Arno Antlitz said rising tariffs alone were adding around €4 billion to annual costs and that existing cost-cutting plans were no longer sufficient; the company has already announced plans to cut 50,000 jobs in Germany by 2030.

The European Central Bank left its benchmark rate unchanged at 2% on Thursday despite Iran-war energy pressure, citing the risk of 'stagflation.' 'The longer the war continues and the longer energy prices remain high, the stronger is the likely impact on broader inflation and the economy,' the ECB said. Jörg Asmussen, CEO of the German Insurance Association, said the bank was 'currently navigating in the fog'; Lena Drager of the Kiel Institute called a preventive hike 'wrong now,' saying it would burden a weak economy without addressing the energy shock.

April unemployment remained above three million at 3.008 million, with a seasonally adjusted rise of 20,000. Federal Employment Agency chief Andrea Nahles said updated forecasts now point to an annual average of 2.978 million unemployed, pushing the agency's deficit higher and forcing it to rely on federal loans after reserves were exhausted last year. Germany's Institute for Employment Research said this week it was more pessimistic about the labour market than at any time since the Covid-19 pandemic.

Filling stations applied a sharp pre-emptive price hike on Thursday, the day before a temporary cut of just under €0.17 per litre takes effect on diesel and petrol. Per ADAC tracking, diesel rose 17.7 cents per litre to an average €2.37 (about $10.52 per US gallon) and the cheapest E10 petrol rose 15.4 cents to €2.26 per litre. A separate war-time rule limits stations to one price increase per day, at midday.

The economic backdrop is now entangled with US-German tensions. Trump said the United States is reviewing a 'possible reduction' of US troops in Germany after Chancellor Friedrich Merz said the United States was being 'humiliated' by Iran. In a social-media post, Trump told Merz to focus on 'fixing his broken country' rather than criticising US Iran policy. Merz, visiting a military training ground in Münster with Finance Minister Lars Klingbeil, said Iran 'must come to the negotiating table' and stop 'playing for time,' and offered that Germany 'stands ready to contribute militarily to guarantee the freedom of maritime routes' if conditions are met.