The Slowdown of the German Economy Due to the Escalating Trade Conflict with the United States

As of mid-2025, the German economy is experiencing a noticeable slowdown, largely due to the escalating trade conflict with the United States, accompanied by tariffs that have burdened German exports, which are the backbone of Europe's largest economy.

According to recent reports, the economy shrank by 0.3% in the second quarter of this year, a decline that surpassed expectations and highlighted the depth of the crisis affecting both industry and investment.

The tariffs imposed by U.S. President Donald Trump are expected to cost Germany up to €290 billion by 2028, according to estimates from the German Institute for Economic Research. These burdens are not only affecting large industrial companies but are also putting pressure on thousands of small and craft businesses, threatening broad sectors of the local economy.

Investor confidence fell in August, reflecting the level of concern within economic circles, especially after the failure of the trade agreement between Washington and the European Union to ease fears.

The automotive sector, the icon of the German economy, is also having a difficult year. Car manufacturers are facing a contraction in demand and a decrease in employment, with grim forecasts suggesting that the number of workers in the sector may decline by up to 186,000 jobs by 2035 compared to 2019.

The overall picture in the labor market is not much brighter, as a survey revealed that nearly a third of companies expect to cut jobs this year. Despite this bleak outlook, there are positive pockets offering some hope to the Germans. The solar energy sector started 2025 with strong growth, keeping Germany as the largest market in Europe and positioning itself to double its capacity in the coming years.

Furthermore, electric car sales saw a remarkable jump in July, increasing by 58% from the previous year, with one in five new licensed cars now running on electricity. This reflects structural shifts in the economy toward green technology.

Looking ahead to 2026, the outlook is more optimistic, with the Ifo Institute for Economic Research predicting a growth rate of 1.5% if trade tensions ease and protectionist policies, which hinder exports, subside.

The German government, for its part, has approved a budget for this year that includes record investments in infrastructure and climate, which could provide a foundation for future growth.

Ultimately, Germany's ability to overcome this challenging phase will depend on its resilience in adapting to a volatile global economic environment, as well as its ability to strengthen its position in innovation and green technology sectors, which could become the new growth engines for the German economy.

By Talal Abu-Ghazaleh