German Economy: A Tale of Two Chapters
Improved outlook for Germany's economic future catches many off guard
Germany's economic fortunes are experiencing a unusual twist thanks to a pause in the trade dispute. Economists are cautiously optimistic, with the six-month economic outlookal soaring by 39.2 points to 25.2 points in May, according to the Mannheim Centre for European Economic Research (ZEW). Even though it didn't meet the economists' predictions of a 11.9-point increase, the surge was lauded as a positive sign.
Achim Wambach, ZEW's President, attributed the optimism to the formation of the new federal government, progress in trade disputes, and a stabilized inflation rate. However, the barometer for the current situation slumped by 0.8 points to -82.0 points, a value clearly outshining any other Eurozone country.
In April, US President Donald Trump declared the "Day of Liberation" and imposed hefty tariffs on numerous trading partners, including the European Union. The tariffs caused ZEW's economic expectations to plummet. Trump later retracted these tariffs for an initial 90 days, but the 25% tariffs on steel, aluminum, and cars, as well as the 10% base tariffs on all other products, continue to affect the EU.
The United States is a significant market for German exports, with 2021 figures showing exports to the world's largest economy totaling around €161 billion, amounting to over 10% of all German exports. This high dependence on US trade has left German exporters vulnerable to any tariff-related threats.
Despite the recent positive outlook, ongoing uncertainty and high tariffs cast a long shadow over Germany's economic growth. The country's manufacturing sector remains under pressure due to the 25% tariff on German cars, a significant portion of exports to the United States.
Moreover, Germany's economy is grappling with other challenges, including high energy costs and weakening demand from China. The ongoing tariff uncertainty and existing tariffs on key exports could potentially lead to a renewed economic slowdown.
In the long term, the impact of these tariffs could be substantial. The German Economic Institute (IW) estimates that Germany's direct losses from U.S. tariffs could reach 200 billion euros annually by 2028, increasing to 290 billion euros with retaliatory measures. This significant potential economic contraction could extend beyond Germany and affect the EU as a whole.
In summary, while the temporarily suspended tariffs provide a glimmer of hope, ongoing uncertainty and persistent tariffs pose significant challenges to Germany's economic growth.
The community policy and employment policy of the new federal government in Germany, along with progress in trade disputes, have contributed to the recent optimism in the economic outlook as per the Mannheim Centre for European Economic Research. However, the finance department must address the potential long-term, detrimental effects of ongoing tariffs, particularly the 25% tariff on German cars, on the business sector and the overall German economy.
