Germany’s industrial recession deepens amid US tariff threats

Bundesbank President Joachim Nagel stated on Monday that Germany is particularly weak to US trade tariff, which could impede growth for years to come and hold back an economy already suffering through two consecutive years of contraction.

Germany’s Struggles with Industrial Recession

Germany, Europe’s largest economy, continues to grapple with a prolonged industrial recession. A key factor behind this downturn is the increasing dominance of subsidized Chinese exports, which are undercutting German products in global markets.

At the same time, Germany’s soaring energy costs have further reduced its competitiveness, exacerbating economic challenges.

Bundesbank’s Warning on U.S. Tariffs

The German central bank, Bundesbank, has analyzed the potential impact of tariff policies proposed by US President Donald Trump. According to Bundesbank President Joachim Nagel, Germany’s heavy reliance on exports makes it particularly vulnerable to trade restrictions.

The bank’s projections suggest that if these tariffs were imposed, German economic output in 2027 would be nearly 1.5 percentage points lower than currently forecast. Given the Bundesbank’s modest growth expectations—0.2% for 2024 and 0.8% for 2026—such a decline could push the economy into further contraction.

Impact on the U.S. and Global Economy

While Germany would face economic pain, the Bundesbank predicts that the U.S. economy would also suffer. The anticipated loss of purchasing power and increased costs for intermediate goods would outweigh any competitive advantages gained through protectionist policies. Similar concerns have been raised by Fabio Panetta, Italy’s central bank chief.

Also read: US producer inflation rises amid tariff concerns and labor shortages

He warned that if Trump’s proposed tariffs were fully implemented—along with retaliatory measures—global GDP growth could decline by 1.5 percentage points, with the U.S. economy taking a 2 percentage point hit.

China’s Potential Response and European Challenges

One of the biggest risks highlighted by Panetta is that Chinese companies, if blocked from the U.S. market, would shift their focus to other global markets, intensifying competition for European manufacturers. This could further weaken Germany’s struggling industrial sector.

Uncertain Inflation Outlook

Bundesbank’s projections on inflation remain mixed. Some models indicate only a minor impact, while others suggest that retaliatory tariffs could significantly increase price pressures.

If trade tensions weaken the euro, import costs could rise, leading to further inflationary challenges for Germany and the broader European economy.

As Germany navigates these economic uncertainties, the potential fallout from global trade policies remains a critical concern for policymakers and industries alike.