Germany is reeling from some of the steepest growth downgrades of any advanced nation as economists warn of its acute vulnerability to the trade barriers being planned by the incoming Trump administration.
Economists polled by Consensus Economics expect the German economy to expand by just 0.6 per cent in 2025, down from 1.2 per cent growth predicted midway through the year. It marks the largest growth forecast reduction over the period of any major industrial economy.
The cuts partly reflect concerns that investment decisions are set to be frozen even before Donald Trump re-enters the White House, as companies defer big commitments or even relocate production. Germany’s own political turmoil adds to the malaise, analysts said.
“The pillars of Germany’s postwar economic miracle — free global trade, its auto industry and Nato — are shaking at the same time,” said Moritz Schularick, president of the Kiel Institute for the World Economy, adding that this is hitting an economy suffering from an ageing workforce, excessive regulation and a backlog in digitisation.
Germany’s real GDP has been stagnating since the second half of 2021. It was poised for another year of tepid growth next year even before Trump won last month’s US presidential election — and now economists have lowered their output predictions even further.
Holger Schmieding, chief economist at Berenberg bank, almost halved his forecast to 0.3 per cent growth in 2025, lower than his predictions for other big Eurozone economies as well as the UK and US. “Germany is heavily exposed,” he said, adding that the risks of a trade war have emerged when there is already “elevated uncertainty about economic policy in Germany”.
For this year, economists surveyed by Consensus Economics nearly a week after Trump’s victory expected the German economy to contract by an average of 0.1 per cent — a downgrade from an expansion of 0.3 per cent forecast in January.
Germany’s unpopular three-way coalition of Social Democrats, Greens and Free Democrats fell apart a day after the US election. A snap poll has been scheduled for late February but coalition talks to form a new government are likely to drag on for months.
“Anxiety and nervousness among German businesspeople is very high,” said Matthias Krämer, head of foreign trade at the Federation of German Industries, adding that an additional hit from the imposition of trade barriers would be “extraordinarily painful”.
The US accounted for 10 per cent of German exports in 2023, its highest level in more than two decades.
Since 2015, the US replaced France as Germany’s single most important trading partner and has continued to grow in importance as China — a fast-growing market in the two decades to the pandemic — massively dialled down its appetite for German products and sanctions hit sales to Russia.
As German imports from the US have risen at a much slower pace, Germany’s trade surplus with the US climbed to a record €63.3bn in 2023. On the eve of the US election, some German exporters have scrambled to ship goods to the country, with exports in September surging 4.8 per cent month-on-month once adjusted for price changes and seasonal swings.
“German companies over the past decades managed to master global division of labour and to strive for highly efficient international supply chains,” said Krämer.
In a scenario where Trump introduces the 20 per cent tariffs on non-Chinese imports he promised in his campaign, German exports to the US could tumble by 15 per cent, the Munich-based Ifo institute estimates.
Highlighting the threat of “geoeconomic fragmentation”, Bundesbank governor Joachim Nagel said full implementation of Trump’s tariff plans could wipe one percentage point off GDP growth.
But economists warn that the pain may be felt in Germany even before any tariff has been introduced, as companies will shelve investment at home over the nagging uncertainty and larger ones may relocate more production to the US.
“This topic has come up in every single discussion with German managers,” Schularick told the FT. Since late 2020 German companies have significantly increased investment in the US, especially in energy-hungry sectors, Bundesbank data shows.
German automakers, which are struggling with the costly transition to electric vehicles, stiff competition from Chinese rivals and bloated costs, and pharmaceuticals groups would be hit particularly hard. The US takes 13 per cent of all German overseas car sales and 22 per cent of its pharma exports. Estimates from the Ifo think-tank suggest both would crash by a third in a full-blown trade war.
Even on their home market, life for German companies will get tougher. Many economists warn that Chinese producers will divert discounted products into the EU if they face even higher US tariffs than their European counterparts. While this could help ease EU inflation, domestic manufacturers’ would face increased competition and margins would be further squeezed.
A decline in German manufacturing — industrial production is 10 per cent below its pre-pandemic level of December 2019, according to official statistics — has not been arrested at a time when other OECD countries including the US and South Korea are boosting output.
The few optimists left are basing their hopes partially on experiences from Trump’s first term, arguing that he created a lot of noise about tariffs but actually imposed only limited levies.
This time, Trump may use the threat of tariffs as a way of extracting policy concessions from allies such as on the push to decouple from China, said Neal Shearing of Capital Economics.
“Germany is critically important in this regard, given that of the major European economies it is the one that has the closest economic ties to China.”
Some of the negative impact on Germany could be mitigated if US demand is stoked up by Trump’s plans for tax cuts, bolstering appetite for German imports — especially if the US dollar continues to appreciate against the euro.
Bert Flossbach, a German investment veteran, is also relatively unfazed, saying many German manufacturers have set up a large US production footprint that would help offset tariffs.
The German Association of the Automotive Industry points out that retaliatory moves by Berlin would hurt American autoworkers — half of the 900,000 vehicles made each year in the US by Volkswagen, Mercedes and BMW are sold outside the country.
Adds Flossbach: “Things of course will become more messy, but I don’t see that the trade dispute [in itself] will result in a mega crisis.”
Additional reporting by Guy Chazan in Berlin