German exports rise 0.9% in May, defying Iran war headwinds

German exports unexpectedly rose 0.9% in May, driven by US-bound shipments, as manufacturers proved resilient to the disruption from the Iran war.

German exports rose 0.9% in May, defying expectations for a decline, as manufacturers shrugged off Iran war uncertainty and boosted shipments to the US and other non-EU markets.

"The data suggest the German economy may have avoided a contraction in the second quarter despite the massive rise in energy prices caused by the Iran conflict," said Ralph Solveen, senior economist at Commerzbank.

The increase, reported by the federal statistics office on Thursday, compared with a consensus forecast for a 0.3% decline in a Reuters poll. Imports fell 2.5% on the month, widening the trade surplus to €19.1 billion from €14.7 billion in April. Exports to non-EU countries rose 3.6%, while shipments to EU member states dropped 1.1%.

The better-than-expected trade data, combined with a 0.9% rise in industrial output and a 1.9% jump in factory orders for May, point to a German economy proving more resilient than many forecasters anticipated. The government last week unveiled a €10 billion reform package including tax relief and pension changes aimed at reviving growth after halving its 2026 forecast to 0.5%.

Industrial production rose 0.9% in May, beating the 0.2% consensus estimate, driven by a 3.6% increase in automotive output, the statistics office reported Tuesday. The less volatile three-month comparison showed industrial production 0.1% higher in the March-to-May period than in the prior three months.

"The developments of the last weeks have provided tentative signs of optimism — for a change," said Carsten Brzeski, global head of macro at ING. He noted that industrial production was actually up in the first two months of the second quarter, not down, despite the Iran war and soaring energy prices.

The resilience in trade and manufacturing contrasts with the broader challenges facing Europe's largest economy. The government in April halved its 2026 growth forecast to 0.5% and cut its 2027 projection to 0.9% from 1.3%, as energy costs from the Iran conflict and increased competition from China weighed on its export-driven model.

Andrew Kenningham, chief Europe economist at Capital Economics, cautioned that the rebound in automotive production was unlikely to be sustained given the structural challenges facing the sector, including the shift to electric vehicles and competition from Chinese manufacturers.

The reform package announced July 2 aims to address some of these headwinds. It includes €10 billion in annual tax relief for lower-income earners, funded partly by raising the top income tax rate to 47% from 45% for those earning €280,000 or more. The government also plans to cut staffing in federal ministries by 8% through digitization and introduce pension reforms modeled on Sweden's system.

"The reform train has no brakes," Brzeski said. "This is a substantial package designed to strengthen Germany as a business location in the long run."

Still, the package faces political headwinds. Chancellor Friedrich Merz's coalition trails the far-right Alternative for Germany party in opinion polls, and unions have criticized proposed changes to sick leave rules and fixed-term employment contracts as attacks on workers' rights.

The export data offers the clearest signal yet that Germany's manufacturing sector can withstand external shocks. The 3.6% jump in shipments to non-EU countries — led by the US — suggests American demand is providing a buffer as European orders soften. Whether that dynamic holds through the second half depends on the trajectory of the Iran conflict and its impact on energy costs, which have already pushed inflation forecasts higher and forced the government to slash its growth outlook.

This article is for informational purposes only and does not constitute investment advice.