The German economy is grappling with an unexpected slump in the manufacturing sector. In January, industrial orders fell by 11.1 percent, marking the worst result in two years. The situation is exacerbated by tensions in the Middle East, which are driving up energy prices and creating stagflationary pressure in the eurozone. Financial markets are reacting with rising bond yields and forecasts of interest rate hikes by the European Central Bank in 2026.
Historic drop in orders
Orders in German industry contracted by 11.1% in January, the largest decline in two years.
Pressure on interest rates
Investors anticipate two ECB interest rate hikes in 2026 to combat energy-driven inflation.
Tensions in the debt market
The spread between Italian and German bonds widened to 84 basis points, with BTP yields at 3.75%.
The German economy is facing a sharp weakening of production activity. Data for January indicates an 11.1 percent drop in industrial orders, a result significantly worse than analysts' forecasts and the worst reading in two years. The current slump is directly linked to macroeconomic uncertainty and the escalation of conflict in the Middle East, which is destabilizing supply chains and commodity markets.
The situation in Germany has a direct impact on the entire eurozone, where fears of stagflation — a combination of low growth and high inflation — are becoming increasingly real. Rising energy costs, fueled by the geopolitical situation, are hitting corporate profitability, as companies struggle to pass these costs on to consumers amid weakening domestic demand. The reaction of financial markets to this news was immediate. Yields on European government bonds began to rise, reflecting investor concerns about the fiscal stability of more indebted countries. The BTP-Bund spread increased to 84 basis points, and the yield on Italian ten-year government bonds reached 3.75 percent. This phenomenon shows growing dispersion in the debt market, where capital is fleeing to safe-haven assets such as German government bonds.
Ten-year government bond yields (selected countries): Germany: 2.45, France: 2.89, Italy: 3.75, Spain: 3.12 The shift in market sentiment has also influenced expectations for monetary policy. Futures markets are currently pricing in two scenarios for interest rate hikes by the European Central Bank in 2026 — the first expected by July and the second by the end of the year. This is intended to be a response to persistent cost inflation. ECB monetary policy scenarios for 2026: Number of rate hikes: no forecasts → two hikes; First timing: unspecified → July 2026; Second timing: unspecified → end of year An additional risk factor is strong pressure on currencies considered safe havens. „Szwajcarski Bank Narodowy musi interweniować natychmiast na rynku, aby osłabić franka” (The Swiss National Bank must intervene immediately in the market to weaken the franc) — chief economist of J. Safra Sarasin — assessed the chief economist of J. Safra Sarasin, pointing to the need to counteract excessive appreciation of the Swiss franc in the face of global unrest. This situation is forcing central banks to revise their previous monetary policy paths, which further burdens the industrial sector with high financing costs.
Mentioned People
- Karsten Junius — chief economist of J. Safra Sarasin