Germany’s economy faces stagnation as tariffs exacerbate existing challenges

The news: Tariffs are jeopardizing Germany’s fragile economic recovery. The EU’s largest economy will grow GDP by just 0.1% this year, according to a biannual update from five German research institutes, as protectionist moves from the US threaten the country’s auto industry and exacerbate existing weaknesses.

• The forecast is a significant downgrade from the 0.8% growth projected in September.
• It also does not take into account the impact of the 20% reciprocal tariff President Donald Trump imposed (then paused) on US imports from the European Union, nor the 10% universal tariff currently in place for all nations except China.

Storm clouds are gathering: The tariffs are making a bad situation worse for Germany, which is struggling to overcome a host of challenges, including high energy costs, a shortage of skilled workers, and extensive bureaucratic red tape, that caused the economy to contract for two straight years.

The 25% tariff on autos is particularly damaging, given that BMW, Mercedes-Benz, and Volkswagen accounted for nearly three-quarters of EU car imports into the US last year. All three companies also have extensive manufacturing bases in North America, although that advantage has been wiped out by US tariffs on Canadian and Mexican imports, not to mention 25% levies on imported car parts, steel, and aluminum.

• Those costs have already resulted in a sizable blow to Volkswagen’s Q1 profits, which were €1.2 billion ($1.3 billion) lower than expected. And more pain is likely to come: The automaker warned it was too soon to fully assess the impact of the tariffs, in part because of uncertainty about how they will be applied and costs associated with them.
• Depending on how those duties are calculated, it could soon become too expensive for German automakers to offer their most affordable—and popular—models in the US. For example, Audi’s bestselling Q5 SUV would be “unsellable” in the US once the combined tariffs on auto and Mexican imports along with an existing 2.5% tariff for non-compliance with the USMCA are applied, sources told Bloomberg.

Our take: German companies are already struggling with increased competition from Chinese businesses, who have benefited from government subsidies that enable them to sell their goods for much lower prices than their European competitors. US tariffs will compound that problem by curbing German businesses’ access to an important growth market.