Germany’s Economy Contracts for Second Straight Year as Tariff Threat Looms #NewsGerman

Germany’s economy contracted for a second year in a row in 2024, underlining the scale of the challenge that will face a new government after elections due in February, including the possibility of fresh tariffs on exports to the U.S.

Economic output in Europe’s largest economy sank 0.2% last year after it declined 0.3% in 2023, the first two-year contraction since 2003, the federal statistics agency said Wednesday.

That performance contrasts with the U.S., where growth has been surprisingly rapid over the same period. But Germany has also lagged behind many of its European peers.

Increasing competition for German exports in key markets, high energy costs, elevated interest rates and an uncertain economic outlook stood in the way of growth, the agency’s president said.

Germany’s economy was a success story for a decade and a half, growing faster than its European peers as it equipped China’s factories with machines and tools it made using cheap energy from Russia.

But it began to falter in 2018, the year in which then-U.S. President Donald Trump confirmed a global turn toward increased protectionism by raising tariffs on imports from China and others, including the European Union. At the same time, German exporters faced tough competition from Chinese counterparts in the more technologically advanced sectors they had previously dominated.

It suffered a further blow when its recovery from the Covid-19 pandemic was hobbled by a sharp rise in energy costs following Russia’s full-scale invasion of Ukraine.

Those setbacks left industrial production 15% lower in November than its record high in 2017. This came alongside inflationary shocks in 2023 that affected consumers around the world.

The car industry, which supports hundreds of thousands of jobs in Germany, also failed to adapt to electric-vehicle production as fast as rivals in the U.S. and China. Workforces are set to be cut at auto giant Volkswagen as well as parts makers Bosch and Schaeffler.

Outside the auto industry, Intel recently delayed construction of a chip plant while a tie-up between Germany’s second-largest lender, Commerzbank, and Italy’s UniCredit is facing government opposition.

Germany’s gross domestic product has been flat since the end of 2019, while the rest of the euro area has grown 5% and the U.S. economy has expanded 11%, according to Goldman Sachs.

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The economy shrank in the final three months of 2024 too, and the moribund performance is set to persist. Germany’s central bank, the Bundesbank, forecasts 0.2% growth in 2025, while others are even more pessimistic. The Kiel Institute for the World Economy expects the economy to stagnate this year.

“It should surprise no one that the German economy shrank again in 2024. However, what is surprising and worrying is that economic output was likely to have declined in the fourth quarter,” Deutsche Bank’s chief economist for Germany, Robin Winkler, said. “If confirmed, the German economy would have lost further momentum at the start of the winter.”

Now threats of U.S. import tariffs by the incoming Trump administration could drag on the export-driven economy further. The tariffs could cost Germany between 0.6 and 1.2 percentage points of GDP, Goldman Sachs said.

The economy will likely be at the forefront of Germans’ minds when they head to the polls in elections next month.

Germany has a constitutionally enshrined fiscal rule that restricts all but a small budget deficit each year. Some economists predict that under a new government, perhaps under front-runner Friedrich Merz of the center-right Christian Democrats, spending could be loosened and therefore prompt more leeway for public investment, particularly on military spending. Merz might also offer more pro-business policies including lower corporate taxes.

“In general, we need more trust in freedom, the market economy and entrepreneurship instead of detailed regulations, excessive reporting obligations and permanent subsidies,” Thilo Brodtmann, executive director of Germany’s VDMA machinery and equipment manufacturers association said ahead of the GDP data.

Lower interest rates as expected this year from the European Central Bank could also prompt more stimulation of the economy. Should Trump’s trade policies be implemented, an ensuing strengthening of the U.S. dollar might make Germany’s exports more attractive.

However, far-right or far-left parties could become spoilers should elections end in a fractured parliament, especially judging that no party is polling close to a majority. Elon Musk, a close adviser to Trump, has backed the far-right Alternative for Germany.

Write to Ed Frankl at [email protected]