US tariffs pose a threat, suggests Bundesbank, as German economy slows down
The German economy, which saw a modest growth of 0.4% in the first quarter, is bracing for a slowdown in the second quarter, according to the German Bundesbank. The growth in the first quarter was primarily driven by industrial production, but the effects from companies bringing forward deliveries in anticipation of U.S. tariffs have now run their course, the Bundesbank has stated.
The U.S. had been Germany's largest export market until 2024, accounting for nearly 10% of German exports. The threat of 30% tariffs on European Union imports, announced by former U.S. President Donald Trump, has cast a long shadow over the German economy. If trade talks with the EU fail to progress, these tariffs could potentially reduce German economic growth by about 0.25 percentage points in both 2025 and 2026, according to the German Macroeconomic Policy Institute (IMK).
The IMK's analysis suggests that these tariffs could halt growth in 2025 and limit it to 1.2% in 2026, compared to an earlier forecast of 0.2% growth in 2025 and 1.5% in 2026. Over the longer term, the negative impact could reach around 0.4% of Germany's GDP after 2025, as short-term effects fade and broader systemic consequences set in.
Additional headwinds stem from the slowdown in U.S. demand, rising inflationary pressure in the U.S., and uncertainty regarding trade relations. These factors could reduce investments and jobs not only in Germany but also in countries integrated into its industrial supply chains, such as Austria and those in Central and Eastern Europe.
In response to these heightened risks, German experts are calling for a swift and decisive fiscal stimulus from the German government. This could be achieved through the rapid implementation of planned public investments detailed in the 2025 federal budget, as well as securing further fiscal support in the 2026 budget discussions.
The German Bundesbank, depicted in the photo, warns of "additional headwinds" from U.S. trade policy, indicating a challenging road ahead for the German economy. The institution's prediction of stagnation in the second quarter is based on the current monthly report, suggesting that the German economy is likely to have stagnated in the second quarter, as previously mentioned.
- The threat of 30% tariffs on European Union imports could potentially impact other industries in Germany's business sector, such as politics and general-news, given their interdependencies with the industrial supply chains.
- The German Macroeconomic Policy Institute's analysis suggests that the tariffs could invalidate the previous financial forecasts for both 2025 and 2026, affecting not only Germany but also economies of countries integrated with its industrial supply chains, such as Austria and Central and Eastern Europe.
- In an attempt to counteract potential economic slowdowns, experts are advocating for a fiscal stimulus in the form of public investments, hoping that this action would positively impact various sectors, including industry and finance, helping Germany to weather the currently unfavorable economic conditions.
