"The biggest risk to the German economy is Trump!" Felix Schmidt, senior economist at German private bank Berenberg in Frankfurt am Main, makes no secret of his weariness. Since Donald Trump’s return to the US presidency, American trade policy has become increasingly chaotic, erratic and precarious. Markets alternate between crashes and periods of euphoria as the US president recalibrates his approach to tariffs. Germany – the quintessential ‘Das Autoland’ and major exporter to the United States – is particularly vulnerable. In 2024, German exports to the US reached €163.4 billion (+4% compared to 2023), representing 10.5% of the country’s total exports.

Since 12 March, the United States has imposed tariffs of 25% on steel and aluminium, followed by 25% on cars from 2 April. However, the US president has suspended the so-called ‘reciprocal’ customs duties of 20% for the European Union for 90 days. "It is difficult to make predictions with this administration," emphasises Johannes Feist, CEO of Mikro Kapital Management. "But we can hope that Trump has understood that he was damaging his own economy with his tariff barriers, which is why he suspended them. But it is not certain and he could very well decide to reinstate them after 90 days." In the meantime, this represents a relief for Berlin, which was already experiencing a difficult period before Trump’s return to the White House. For the past couple of years, Europe’s leading economy has been struggling, recording a second consecutive year of recession in 2024 – a phenomenon unprecedented since 2002–2003.

"The German economy has been struggling for several years," confirms Alessandro Valentino, product manager at VanEck. "The manufacturing, automotive, chemical, and construction sectors are particularly affected, suffering from high energy costs, weak global demand, and growing competition from China. Since 2019, German industrial production has fallen by 10%."

The consequences are evident: emblematic industrial pillars of ‘made in Germany’ are suffering – Volkswagen, Porsche, Mercedes, Bosch, Continental, Audi, Bayer, ThyssenKrupp, BASF (among others) – all announcing massive layoffs or factory closures in recent months. On the political front, growing public concern has rekindled deep anxieties about national identity, fuelling support for the far-right party AfD (Alternative für Deutschland), which became the country’s second-largest political force in the February 2025 legislative elections, securing 20.8% of the vote.

How can we explain the decline of a country that has long been a European exception with its robust growth, record exports, and fiscal discipline? "Germany has faced an exceptional series of difficulties in recent years," replies Fares Benouari, senior portfolio manager at Union Bancaire Privée (UBP). "Other European countries such as France also have problems, but only Germany has to face them all simultaneously."

Germany’s difficulties stem from both structural and cyclical factors. Structurally, the country confronts an ageing population, high labour costs, bureaucratic complexity, and a particularly challenging ecological transition. These factors compound economic problems: declining exports due to slowing Chinese demand, surging energy prices since the war in Ukraine began, and eroding competitiveness in the face of increasingly fierce international competition, particularly from China. "Together, these factors make a prolonged economic slowdown increasingly likely," says Alessandro Valentino.

Germany thus faces, at best, a third year of sluggish growth in 2025. The German Federal Bank predicted a modest rise of only 0.2% in gross domestic product (GDP) at the end of 2024. "In the short term, the outlook for 2025 is cautiously optimistic," confirms Christian Schwab, head of Portfolio Management at Rothschild & Co Wealth Management Germany. "After two years of negative growth, a slight recovery is expected."

This represents the first fruits of the German government’s efforts to revitalise the economy. Less than a month after the legislative elections, and even before his appointment as chancellor, Friedrich Merz secured approval from both the Bundestag and Bundesrat in March for an ambitious recovery plan. This initiative provides for several hundred billion euros of investment in defence and infrastructure while reforming the ‘debt brake’, allowing for significantly increased borrowing to stimulate growth.

"This is the biggest investment plan in Europe since the Marshall Plan in 1948," says Fares Benouari. "The massive capital injection should boost the country’s economy." Christian Schwab shares this view: "The German fiscal programme is a historic initiative," emphasises the head of Portfolio Management at Rothschild & Co Wealth Management Germany. "These measures should have a positive impact on long-term economic growth, even if the exact scale of this impact is difficult to predict. In the best-case scenario, potential growth could increase considerably."

Several sectors should particularly benefit from state funding, notably the defence industry (companies such as Rheinmetall, Renk, and Hensoldt), construction (Heidelberg Materials), transport excluding automobiles (Siemens), digitalisation (SAP), and renewable energy (Siemens Energy). “Construction and defence will be the first sectors to benefit from the stimulus package,” emphasises Felix Schmidt. “In the medium term, military Research & Development often has positive spill-over effects in other areas.”

Other positive indicators include falling energy prices, which should restore some competitiveness to German companies. "Despite the circumstance, we remain optimistic for Europe in general and for Germany in particular," continues Felix Schmidt. "While the United States is Germany’s leading overall trading partner, Europe is more important. It imports more German products than the United States. Beyond that, China is also an important trading partner, buying 6% of German exports."

Indeed, a significant part of Berlin’s future will be determined in Beijing. Between 2016 and 2023, China was Germany’s leading trading partner. Throughout these years, Berlin’s prosperity was fuelled by Beijing’s growth. However, trade between the two countries has steadily declined recently due to several aspects: falling Chinese demand, strengthened self-sufficiency policies by the Communist Party, and stronger competition from local Chinese products. In 2024, German exports to the Asian giant fell by approximately 7% compared to 2023, to around €90 billion.

What does the future hold? In an open conflict with Washington, can Beijing regain sustained growth and boost its imports of German products? This scenario appears uncertain because China, a long-standing customer of German industry, increasingly proves to be a competitor, as evidenced in the automotive sector. "Historically, Chinese car manufacturers have copied German brands," recalls Felix Schmidt. "But today, the situation has reversed: German manufacturers must learn from their Chinese counterparts. A competitive car today is primarily defined by its battery technology and software capabilities – two technologies that Chinese manufacturers have mastered better than Germans due to their extensive experience with smartphones."

Furthermore, the automotive industry still faces US tariffs of 25%. Consequently, in early April, Audi decided to suspend its exports to the United States until conditions improve. On Monday 14 April, however, the US president hinted that he might ease or temporarily suspend the customs surcharges introduced on 3 April on imported cars, in order to give companies some time to relocate their production to the United States. This new about-turn was greeted with relief by the markets.