Investor confidence in Germany declined in October for the first time since April, weighed down by persistently high energy prices amid ongoing Middle East conflicts. The ZEW Indicator of Economic Sentiment, which surveys the expectations of 178 analysts and investors from banks, insurance companies, and other businesses, dropped 6.6 points to 28.1. This figure was below economists’ forecasts, which had anticipated a fall to 29.9.

Germany’s economy has gradually emerged from a period of stagnation, but the recovery remains fragile, according to ZEW President Achim Wambach. He attributed the softness in private consumption and investment to elevated energy costs, which are compressing real incomes, raising production expenses, and sustaining inflation for an extended period.

In addition to energy concerns, increased bond spreads in France and political uncertainty within Germany may have contributed to declining investor expectations. Claus Vistesen of Pantheon Macroeconomics pointed to Chancellor Friedrich Merz’s challenges following significant gains by the far-right Alternative for Germany party in two regional elections in September.

Despite these headwinds, the German economy is projected to accelerate this year, supported by stronger-than-expected exports and government fiscal stimulus aimed at defense and infrastructure. The International Monetary Fund recently forecast 1.3% GDP growth for Germany in 2026, an improvement from last year’s 0.2%.

Inflation, however, remains a concern. Energy prices have stayed elevated with little resolution in sight for the Middle East tensions driving the volatility. In response, the European Central Bank raised its key interest rate for the second time this year in September and is expected to implement further hikes before the year’s end.