BERLIN – Germany’s economy contracted by 0.3% in the second quarter of 2024 compared to the first three months of the year, as demand from its largest trading partner, the United States, slowed following months of preemptive purchases in anticipation of new U.S. tariffs. The Federal Statistics Office revised its earlier estimate of a 0.1% contraction on Friday, further dimming expectations of a strong economic rebound for Europe’s largest economy.
Carsten Brzeski, global head of macroeconomics at ING, warned, “It looks increasingly unlikely that any substantial recovery will materialize before 2026.” The slowdown underscores Germany’s unique position as the only G7 country to have failed to grow over the past two years. Trade tensions and high tariffs could push the nation toward a third consecutive year of stagnation—a scenario unprecedented in post-war German history. Reviving the economy has become a top priority for the new German government, especially amid concerns that U.S. President Donald Trump’s tariffs may continue to hurt the export-driven economy. On April 5, a baseline U.S. tariff of 10% on German goods took effect, directly affecting key sectors such as automotive, machinery, and industrial equipment.
To counter the slowdown, Germany has implemented an “investment booster” initiative, allowing companies to benefit from improved depreciation options. The government has also pledged increased spending on infrastructure and defense, alongside plans to reduce corporate taxes. However, officials acknowledge that these measures alone may not be enough to restore long-term growth.
A spokesperson for the Economy Ministry stated, “What has been decided so far is not enough. More is needed to make Germany competitive again and put it back on track for growth.” Experts agree that additional fiscal incentives and structural reforms will be critical to prevent deeper economic stagnation.
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Industrial Output and Consumer Spending Lag Behind Expectations
The revised statistics highlight weaker-than-expected industrial production, signaling challenges for Germany’s manufacturing sector. Household consumption, a vital driver of domestic demand, was adjusted to show a mere 0.1% increase in the second quarter due to updated data from service sectors, including accommodation and food services.
Meanwhile, government spending grew by 0.8% compared to the previous quarter, reflecting ongoing public investment efforts. Private investment, however, fell sharply by 1.4%, indicating hesitancy among businesses in response to economic uncertainty and trade barriers.
Exports, which play a pivotal role in Germany’s economy, also underperformed. Total exports of goods and services fell 0.1% in the second quarter, highlighting the tangible impact of U.S. tariffs on German trade. While a framework trade agreement between the EU and U.S. was reached in late July, only the baseline tariff of 15% has been implemented so far. The European Union is awaiting executive orders from the White House to finalize carve-outs for key industries, such as automotive, to mitigate the adverse effects of trade restrictions.
U.S. Remains Germany’s Largest Trading Partner
In 2024, the United States remained Germany’s biggest trading partner, with two-way goods trade totaling 253 billion euros ($293 billion). The ongoing trade tensions underscore the risks inherent in Germany’s reliance on external markets, particularly as global economic uncertainty grows. Analysts suggest that sustained trade friction with the U.S. could exacerbate domestic slowdowns, affecting jobs and industrial output.
Despite these challenges, there are some positive signs. The private sector experienced modest growth in August, primarily driven by manufacturing. The HCOB Flash Germany Composite Purchasing Managers Index (PMI) revealed a rise in manufacturing orders, suggesting that demand may gradually rebound in the coming months.
Economic Outlook and Policy Measures
Economists are cautiously optimistic that the German economy will recover gradually, supported by interest rate cuts from the European Central Bank (ECB) and a more expansionary fiscal policy. Ralph Solveen, senior economist at Commerzbank, noted, “The economy is likely to pick up in the coming quarters. However, this upturn may be moderate due to structural problems and higher U.S. tariffs.”
Germany’s structural issues include an aging population, energy dependency, and a manufacturing sector increasingly exposed to global competition. These factors, combined with geopolitical uncertainties and trade disputes, could limit the country’s ability to achieve sustained growth.
The government’s current measures, including investment incentives, corporate tax reductions, and increased public spending, aim to stimulate domestic demand and improve competitiveness. Nevertheless, additional reforms targeting innovation, digitalization, and energy efficiency will be necessary to secure long-term resilience.
Impact on Key Sectors
The automotive industry, a cornerstone of the German economy, has been particularly vulnerable to U.S. tariffs. High export volumes to the U.S., coupled with the additional 10% duty on German cars, have led manufacturers to reassess production and pricing strategies. Machinery and industrial equipment exports have faced similar pressures, slowing overall industrial output.
Consumer-facing sectors, including retail and hospitality, have shown only modest growth. Household spending barely increased in the second quarter, reflecting cautious consumer sentiment amid economic uncertainty. Government investment, though helpful, has yet to fully counterbalance declines in private sector activity and exports.
Global Trade Relations and Germany’s Position
The framework trade agreement between the EU and U.S., announced in late July, represents a partial step toward resolving trade tensions. However, until executive orders are issued to clarify exemptions for sensitive sectors, uncertainty will persist. Analysts warn that Germany must diversify trade relationships to reduce reliance on a single market and mitigate risks from geopolitical disputes.
The German economy’s heavy dependence on exports makes it particularly sensitive to global trade fluctuations. With the U.S. as its largest partner, even minor policy changes can ripple across production, employment, and investment decisions. Experts recommend that Germany strengthen intra-European trade, expand markets in Asia, and invest in high-value industries to maintain economic stability.
Moderate Recovery Expected
While near-term challenges persist, the German economy is expected to experience moderate recovery in the latter half of the year. Lower interest rates from the ECB, coupled with targeted fiscal measures, should support manufacturing orders and investment activity. Nonetheless, economists caution that structural hurdles and ongoing trade tensions will likely limit the pace and scale of the rebound.
Carsten Brieske emphasizes that any significant recovery before 2026 is improbable. The government and businesses must act decisively, focusing on innovation, sustainability, and diversification to safeguard Germany’s economic future.
Frequently Asked Questions:
Why did Germany’s economy shrink by 0.3% in Q2 2024?
Germany’s economy contracted due to slowed demand from its largest trading partner, the United States, following months of preemptive purchases ahead of U.S. tariffs. Declines in industrial production, exports, and private investment also contributed.
How have U.S. tariffs affected German exports?
U.S. tariffs, including a baseline 10% duty on German goods, have reduced competitiveness, particularly in automotive, machinery, and industrial equipment sectors, leading to a 0.1% drop in total exports in Q2.
What sectors of Germany’s economy are most impacted?
Germany’s manufacturing sector, including automotive and machinery industries, is heavily affected. Household consumption and private investment also saw slower growth, while government spending slightly increased.
What measures is Germany taking to revive growth?
The German government has introduced an “investment booster” program, improved corporate tax conditions, increased infrastructure and defense spending, and plans to implement further reforms to stimulate growth.
When is Germany expected to recover?
Economists suggest that a substantial recovery may not occur before 2026 due to structural challenges, trade tensions, and global economic uncertainties. However, moderate growth is possible in the coming quarters with supportive fiscal policies.
Who is Germany’s largest trading partner?
The United States is Germany’s largest trading partner, with two-way trade totaling approximately 253 billion euros ($293 billion) in 2024.
Can Germany overcome the impact of U.S. tariffs?
Germany can mitigate the effects by diversifying trade partners, enhancing competitiveness, investing in innovation, and implementing structural reforms. Immediate relief measures, however, are only partially effective.
Conclusion
Germany’s 0.3% economic contraction in Q2 highlights the pressures of global trade tensions, particularly the impact of U.S. tariffs on its export-driven economy. Weak industrial output, declining exports, and reduced private investment underscore the structural challenges facing Europe’s largest economy. While government stimulus measures and modest private sector growth offer some hope, analysts warn that a significant recovery may not materialize before 2026. To regain momentum, Germany must implement comprehensive reforms, diversify trade partnerships, and strengthen domestic investment, ensuring long-term stability and competitiveness in a rapidly changing global market.