By Don Nico Forbes

Industrial production in Germany unexpectedly rose for a second consecutive month in May despite higher energy costs and operational uncertainty due to the conflict in the Middle East.

Output was 0.9% higher on month, following an uptick of 0.2% in April, Germany's statistics agency Destatis said Tuesday. This marks the strongest reading since March 2025.

A consensus of economists polled by The Wall Street Journal expected a decline of 0.2%.

In the less volatile three-month comparison, output from March to May was 0.1% higher than in the three prior months, Destatis said.

Output was driven by a significant increase in the automotive industry and an uptick in the construction sector. Production in energy-intensive industries also added to the momentum, the agency added.

The rise in output follows an uptick in factory orders in May, which could point to a recovery in activity ahead. From June, production is also expected to have been supported by easing tensions between the U.S. and Iran, with declining oil and gas costs providing some relief to Germany's energy-intensive industrial sector.

But the Middle East conflict is continuing to make German industrial data difficult to interpret, Sebastian Wanke, an economist at KfW Research, said in a note.

"The effect of bringing forward purchases due to fears of supply shortages is countered by caution stemming from concerns about the future," he said.

Germany's industrial sector had been expected to stage a modest recovery this year after years of subdued output that began before the pandemic. Optimism was fueled by the government's pledge last year to mobilize more than $1 trillion for defense and infrastructure spending.

But the war in Iran has added downside risks to growth. The outlook for industry could also be constrained by higher borrowing costs after the ECB raised interest rates in June to prevent higher energy prices from feeding through into broader inflation.

Still, many economists expect the central bank's focus to shift from inflation risks to slowing growth in the coming months. A sustained recovery in German industry is seen as crucial to lifting the wider eurozone economy.

The ECB lowered its growth forecasts last month, projecting the eurozone economy will expand 0.8% this year and 1.2% in 2027.

But signs of a recovery in German industry are nevertheless gathering steam. In June, Germany's Ifo Institute reported rising optimism among firms amid easing geopolitical tensions.

Higher output and orders suggest the Germany economy avoided a contraction in the second quarter despite elevated costs and uncertainty, said Ralph Solveen, senior economist at Commerzbank, in a note.

"In the second half of the year, it is likely to resume its recovery in light of the recent sharp drop in oil prices," he added.

Write to Don Nico Forbes at don.forbes@wsj.com