Germany faces third possible year of contraction amid US tariffs, analysts say

All the economists interviewed say the trade conflict increases the need for structural reforms, and that subsidies may not be the answer

A general view shows containers at the loading terminal "Burchardkai", in the harbour in Hamburg, Germany, Apr 3, 2025. REUTERS/Fabian Bimmer

The tariffs announced by the United States will deal a major blow to the German economy, delaying a recovery and possibly putting Europe's biggest economy on track for a third year of recession for the first time in history, analysts said.

Germany, the biggest trading partner of the United States, had a trade surplus of a record 70 billion euros with the US in 2024. An export-oriented nation, Germany will be the biggest European loser in a trade war.

"Overall, the economic risks for 2025 are leaning towards a third consecutive year of recession," said Marc Schattenberg, senior economist at Deutsche Bank Research.

German trade will likely suffer in three ways: exporting less to the US, and less to China, and it may feel an impact from an increase in competition as new markets are sought to take products previously exported to the US, Ifo expert Lisandra Flach said.

The country "is simply facing the hard reality that the world has changed," Carsten Brzeski, global head of macro at ING, told Reuters, who also expects a contraction in 2025.

Germany was the only G7 country that failed to grow for the last two years, and reviving the economy was a key topic during the campaign ahead of February's election.

After the vote, the conservatives led by Chancellor-in-waiting Friedrich Merz and the Social Democrats, who are negotiating to form a government, announced a 500 billion euro ($544 billion) fund for infrastructure and sweeping changes to borrowing rules to bolster defence and revive growth.

TIMELY STIMULUS

"The unexpectedly huge and timely German fiscal stimulus can help to offset some of the trade war damage, but the risks to our forecasts are tilted towards lower growth," Berenberg's chief economist Holger Schmieding said.

Still, the fiscal bonanza is unlikely to boost the economy in the short term, with comprehensive effects to be expected for 2026 and 2027.

In the coming months, the new German government has limited options to protect its export industry and broader economy, and consumer and business confidence may remain subdued.

All the economists interviewed said the trade conflict increased the need for structural reforms, and that subsidies may not be the answer.

"Germany has the firepower for subsidies, but I don’t think that it will and should be used for this purpose," said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank.

Hamburg Commercial Bank recently revised the forecast for 2025 to 0.6 percent growth and will wait for coalition negotiations to finish before updating it.

So far, the economic programme negotiated by the future coalition parties is underwhelming, economists said, urging bolder steps to speed investment and boost German competitiveness.

"Trump’s tariffs are another reason for the current coalition talks to really focus on structural reforms and a sustainable strengthening of the domestic economy," Brzeski said.