Introduction: A Stark Revision to Growth Forecast
On April 9, 2025, Germany's economic institutes revised their forecast for the country's economic growth in 2025, significantly lowering it from 0.8% to just 0.1%. This sharp decline reflects growing concerns over the impact of US tariffs on a range of goods, including steel, aluminum, and cars. While the forecast revision accounts for the 25% US tariffs, it does not yet include the EU's planned retaliatory tariffs—set at 20%—on American goods, which could have an even more severe impact on the German economy.
Germany's situation is especially dire considering it was the only country in the G7 group of major industrialized nations to experience zero growth over the past two years. Now, the nation faces fresh challenges that could exacerbate the economic downturn, particularly in critical sectors like manufacturing and exports.
US Tariffs and Their Impact on German Exports
The US tariffs are having a broad and multifaceted impact on the German economy. The 25% tariffs imposed by the US on steel, aluminum, and automotive products are directly targeting some of Germany’s most important export sectors. In addition, secondary effects from tariffs on goods such as machine tools and tool parts (which are integral to Germany’s manufacturing sector) are expected to hurt its exports further.
According to the WVStahl industry association, Germany exports 2.4 million metric tons of steel-related products (including machine tools, tool parts, and components) to the US. These exports represent a significant portion of Germany's indirect steel trade, making the country particularly vulnerable to the new tariffs. The impact of these tariffs is expected to be twofold:
• Direct damage from tariffs on steel and aluminum products.
• Secondary damage from tariffs affecting the automotive and machine tool sectors, industries that also rely heavily on steel.
The steel industry, in particular, is feeling the squeeze. Not only is demand for steel already declining globally, but the imposition of tariffs by the US could act as a "crisis accelerator" for the sector. The compounded effects of lower demand and higher costs due to tariffs could significantly undermine Germany’s manufacturing and export-led economy.
Germany's Economic Stagnation and Slow Recovery
Germany's economic stagnation is particularly concerning. Over the past two years, it has failed to show significant growth, unlike its counterparts in the G7. This is attributed to a variety of domestic and external factors, including:
• Weak demand for industrial goods both within Europe and globally.
• Supply chain disruptions due to global trade tensions and the aftermath of the COVID-19 pandemic.
• Rising energy costs, particularly after the war in Ukraine, which impacted Germany’s access to affordable energy supplies.
Looking ahead, the new growth projection of 0.1% for 2025 indicates that Germany will remain in a fragile economic position. The revocation of tariffs or any trade deals with the US or the EU could help, but the situation remains challenging, particularly in the manufacturing sector.
Future Outlook: A More Promising 2026 and 2027?
The revised economic growth projection for 2026 is slightly more optimistic, with forecasts now predicting just above 1% growth, down from a previous estimate of 1.3%. This reflects a cautious rebound, supported by investments in infrastructure and defense, as well as the fiscal measures being implemented by the German government.
After the German elections in February, the Conservatives and Social Democrats began negotiations to form a government that would focus on:
• Establishing a €500 billion special fund to boost infrastructure development.
• Making changes to borrowing rules to bolster defense spending and provide economic stimulus.
These initiatives aim to strengthen Germany's long-term growth prospects and potentially stimulate growth in 2026 and 2027, as the government works to counterbalance the damage caused by tariffs and global trade challenges.
The Steel Sector: A Key Vulnerability
The steel industry in Germany remains one of the most vulnerable sectors. According to the WVStahl industry association, Germany's indirect steel exports (in the form of machine tools, tool parts, and components) to the US amount to 2.4 million metric tons. This puts the steel sector at the forefront of the trade war and leaves it exposed to both direct and secondary tariff impacts.
The ongoing decline in steel demand coupled with the new tariffs could lead to an industry crisis. German manufacturers that rely on steel as a primary input are already struggling with higher costs and tighter margins. This combination of factors is expected to continue to weigh heavily on Germany's industrial output in the coming years.
Key Takeaways:
• Germany’s 2025 economic growth forecast has been slashed to just 0.1%, down from 0.8%, primarily due to the 25% US tariffs on aluminum, steel, and cars.
• The forecast does not yet account for the EU's retaliatory tariffs (set at 20%) on American goods, which could worsen the economic outlook.
• Germany was the only G7 country not to grow over the past two years, highlighting its vulnerability amid global trade tensions.
• The US tariffs on steel, aluminum, and automobiles could be a "crisis accelerator" for Germany’s steel industry, with the WVStahl association reporting 2.4 million metric tons of indirect steel exports to the US.
• The steel sector faces both direct and secondary damage from US tariffs, as demand for steel continues to decline.
• 2026 and 2027 forecasts predict slightly higher growth, with a 1% growth in 2026, supported by infrastructure investment and defense spending.
• A €500 billion fund is being set up by the new German government to stimulate infrastructure and defense spending, which could bolster economic recovery in the medium term.
