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Germany’s Services Sector Nears Recovery in July

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Germany’s services sector showed signs of stabilising in July as business activity contracted at a much slower pace and demand began to recover. The HCOB Germany Services Purchasing Managers’ Index (PMI) rose to 49.8 from 48.6 in June, its highest reading in recent months and just below the 50-point mark that separates contraction from growth.

The survey showed new business increased for the first time in five months, signalling improving demand, while employment declined at the slowest pace since job cuts began earlier this year. Export orders continued to fall but at the weakest rate in five months, suggesting external demand is also stabilising.

Despite the improvement, rising input costs and higher prices charged by businesses highlighted persistent inflationary pressures. Analysts warned that uncertainty surrounding the Iran war, volatile energy prices, and supply chain disruptions continue to pose risks, although Germany’s broader economy returned to growth in July as stronger manufacturing activity lifted the composite output index above the expansion threshold.

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Euro Zone Business Activity Rebounds in July

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Business activity across the euro zone accelerated to an eight-month high in July, driven by a recovery in the services sector and continued strength in manufacturing. The S&P Global Euro Zone Composite PMI rose to 52.0 from 50.0 in June, moving back into expansion territory for the first time since March, while the Services PMI climbed to a five-month high of 51.7.

The improvement was broad-based, with Germany returning to growth and stronger performances recorded in Italy and Spain. France remained the only major economy still in contraction, although at a slower pace. New orders increased at their fastest rate since November, employment stabilised after six months of declines, and business confidence improved despite ongoing geopolitical uncertainty.

Analysts said the conflict in the Middle East, particularly the Iran war, continues to cloud the economic outlook. While inflation in input and output costs eased, euro zone inflation edged up to 2.9% in July, reinforcing expectations that the European Central Bank could raise interest rates again in September, potentially weighing on consumer spending and business demand.

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BMW Shares Plunge Following Severe Profit Warning Linked to China Slump and Iran War

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Shares in premium automaker BMW tumbled 8% in early Frankfurt trade following a severe profit warning issued late Tuesday. The company attributed the drastic guidance downgrade to a deepening economic downturn in China and the global fallout from the war in Iran, which has driven up energy costs and severely dented international consumer confidence. Analysts at Deutsche Bank and Jefferies noted that the sudden revision caught the market off guard, representing a far more substantial decline than anticipated.

In response to these compounding headwinds, BMW slashed its 2026 core automotive operating margin forecast to just 1–3%, down significantly from its previous estimate of 4–6%. The Munich-based manufacturer also revised its group pre-tax profits from a projected moderate decline to a “significant decrease,” while warning that vehicle deliveries will likely slide rather than remain steady. To buffer against these losses, BMW announced it will sharply accelerate structural and efficiency cost-cutting initiatives, which will trigger a major one-time negative impact on its earnings in the second half of 2026.

Industry experts suggest that this massive guidance cut signals a broader strategic overhaul for the German luxury automaker. Financial analysts at Jefferies remarked that the impending restructuring will heavily impact BMW’s domestic German operations. They pointed out that the crisis may force the company to reevaluate its global assembly footprint and legacy business model, which remains heavily reliant on exporting internal combustion engine (ICE) powertrain components out of Germany.

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European AI Stocks Defy Geopolitical Gloom Amid Iran War

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Despite a darkening backdrop for European equity markets caused by the energy shock of the Iran war, the region’s tech sector is experiencing a massive, under-the-radar rally. While the conflict has dampened overall economic growth and caused the broader STOXX 600 index to drop just over 2% since late February, European tech shares have surged 10%, hitting their highest levels since 2000. Data indicates that euro zone economic activity fell sharply in May, yet AI-related baskets have accounted for over two-thirds of the positive performance in European stocks over the past month and a half.

Research from TS Lombard highlights two specific European AI baskets that are performing on par with the Nasdaq. The first basket, consisting of semiconductor supply chain firms like ASML, Infineon, and STMicroelectronics, has rallied by roughly 20% since the start of April. The second basket, which focuses on AI infrastructure buildout firms like Schneider Electric and Prysmian, has jumped around 22%. This surge was reignited globally in April as strong tech earnings, including Nvidia’s recent stellar revenue report, reassured investors that corporate spending plans on AI remain highly robust.

Analysts suggest this tech rally has further room to run, reinforced by a secular push toward innovation, defense, and energy security. Furthermore, European tech stocks present an attractive valuation advantage, trading at almost 28 times expected earnings compared to nearly 35 times for their U.S. competitors on the Nasdaq. Although the tech sector only makes up about 10% of the heavily financial- and industrial-dominated European benchmark, its resilience proves that looking through the current macroeconomic chaos reveals significant regional winners.

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Iran War Slows European Economy as Prices Surge Across Region

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Europe’s economy is facing mounting pressure as the ongoing Iran war drives up energy costs and weakens business activity across the region. Fresh data showed the euro zone economy contracted at its fastest pace since late 2023, with rising fuel and living costs reducing consumer demand and hurting the services sector. Economists warned the crisis is adding to the financial strain many households have faced since the pandemic-era cost-of-living surge.

The latest S&P Global survey showed the euro zone Composite PMI dropped to 47.5 in May, signaling continued economic contraction, while countries including Germany and France reported declining private sector activity. Businesses cited higher fuel and energy expenses, weaker orders, and growing economic uncertainty as major challenges. Inflationary pressures also intensified, with companies increasing prices at the fastest pace in more than three years.

The worsening outlook is creating a difficult balancing act for policymakers and the European Central Bank. While inflation remains above the ECB’s target, slowing growth and rising job losses are increasing fears of a broader recession. The European Commission has already downgraded its growth forecasts for the euro zone and warned that prolonged energy disruptions could weaken the economy even further in the coming months.

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German Minister Blames Trump Iran Policy for Economic Slowdown and Tax Revenue Drop

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Germany’s finance minister Lars Klingbeil has blamed former US President Donald Trump’s “irresponsible war in Iran” for a sharp decline in Germany’s expected tax revenues. Speaking in Berlin, he said the conflict had triggered a “global energy shock,” contributing to weaker economic performance. German authorities have cut projected tax revenues for 2026–2030 by about €70 billion, citing the impact of rising energy costs and global instability.

The comments come amid growing diplomatic tension between Berlin and Washington. Chancellor Friedrich Merz has previously criticized US strategy in Iran, prompting backlash from Trump, who accused German leadership of mismanaging the economy and energy policy. The exchange has further strained already fragile transatlantic relations, with both sides trading criticism over the handling of the conflict and its global consequences.

The war between the US-Israel alliance and Iran, which began in late February, has disrupted global energy markets, particularly through threats to the Strait of Hormuz, a key route for oil and LNG shipments. Although a ceasefire is in place and negotiations continue, uncertainty remains as talks stall and trade disruptions persist, adding pressure to already stagnant European economies like Germany.

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Oil Prices Surge Amid Fears of Iran War Escalation

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Oil prices have climbed to their highest level since 2022 following reports that the US military is preparing to brief President Donald Trump on new options related to the Iran conflict. Brent crude jumped nearly 7%, briefly surpassing $126 per barrel, driven by concerns over potential military action and worsening geopolitical tensions in the region.

The rise comes as peace talks appear stalled and the crucial Strait of Hormuz remains effectively closed, disrupting global energy supplies. Reports suggest possible US plans include targeted strikes on Iranian infrastructure or efforts to secure the waterway for shipping. Even the possibility of escalation has triggered strong reactions in oil markets, given the strait’s importance for global energy transport.

Higher crude prices are already impacting fuel costs and raising concerns about inflation worldwide. Analysts warn that sustained price increases could have wide-ranging economic effects, influencing everything from transport costs to consumer prices. Meanwhile, global stock markets showed signs of strain, reflecting growing uncertainty over the conflict and its impact on energy supply chains.

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German Economy Sees Q1 Growth but War Clouds Outlook

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Germany’s central bank, the Deutsche Bundesbank, said the country’s economy likely recorded modest growth in the first quarter, supported by solid industrial output and resilient services activity. Despite weakening consumer confidence toward the end of the quarter, exports and business-related services helped sustain overall momentum.

However, the outlook for the second quarter remains fragile as the ongoing Iran conflict begins to weigh more heavily on Europe’s largest economy. The war has pushed up energy prices, disrupted supply chains, and increased uncertainty, all of which are expected to dampen growth. The Bundesbank cautioned that only slight expansion is likely in the near term, even as government spending aims to support recovery.

Rising fuel costs have already eroded household purchasing power, weakening private consumption further. In addition, softer global demand and cautious business sentiment are expected to impact exports and investment. While fiscal measures may provide some support, escalating geopolitical risks continue to pose significant challenges to Germany’s economic outlook.

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ECB Warns Inflation Expectations Could Rise Quickly Amid Energy Shock

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A European Central Bank policymaker has warned that inflation expectations in the euro zone could climb faster than previously seen, urging the ECB to remain ready to raise interest rates if price pressures persist. Dimitar Radev said rising energy costs linked to the Iran conflict have pushed inflation above the ECB’s 2% target, increasing risks that higher prices could spread across the broader economy.

Radev noted that the balance of economic risks has shifted in an unfavorable direction, with the likelihood of a more adverse scenario increasing due to ongoing uncertainty and energy market disruptions. Policymakers are concerned that consumers and businesses, still influenced by the inflation surge following Russia’s invasion of Ukraine, may quickly adjust wage and pricing behavior, potentially triggering a self-reinforcing inflation cycle.

While inflation expectations remain broadly anchored and no strong second-round effects are visible yet, the ECB cannot assume stability will continue, Radev said. Financial markets already expect multiple rate hikes this year, though it remains too early to determine whether action will come at the April meeting. The ECB will closely monitor wages, energy prices, economic sentiment, and the duration of geopolitical tensions before making policy decisions.

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German Inflation Rises Amid Energy Shock from Iran Conflict

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Inflation increased to at least 2.5% across four German states in March, driven largely by rising energy prices linked to the ongoing U.S.-Israeli conflict with Iran. In North Rhine-Westphalia, Germany’s most populous state, annual inflation climbed to 2.7% from 1.8% in February. Similar increases were recorded in Bavaria, Baden-Wuerttemberg and Lower Saxony, signalling a likely nationwide rise in inflation figures expected later in the day.

Economists surveyed by Reuters predict Germany’s harmonised inflation rate will reach 2.8% in March, up from 2.0% the previous month. Analysts warn that while energy costs are currently the main driver, broader price increases may follow. Berenberg Bank chief economist Holger Schmieding said higher transport costs and potential fertiliser shortages could push food prices higher, with inflation possibly exceeding 3% if the conflict continues.

A survey by the Ifo institute showed German companies increasingly expect to raise prices due to rising production and transport expenses. The data comes ahead of eurozone inflation figures, with markets anticipating further monetary tightening by the European Central Bank. Investors now expect up to three interest rate hikes this year as policymakers respond to mounting inflation pressures.

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