Germany’s economy has been facing significant headwinds in recent months. Preliminary data for the third quarter showed that the country's GDP grew by just 0.2%, following a contraction of 0.3% in the previous quarter. Although this marginal growth allowed Germany to narrowly avoid a technical recession, the overall economic outlook remains bleak. In fact, the German Economy Ministry has revised its expectations, forecasting that the country’s economy may contract rather than grow in 2024.

Several economic indicators paint a lackluster picture for Germany. For instance, the Composite PMI (Purchasing Managers’ Index) for October, while slightly improving, remains in contraction territory. The PMI is a key indicator of economic health, and its continued contraction suggests a slowdown in industrial and manufacturing activity. These figures, coupled with the GDP slowdown, signal that Germany's economy is struggling to pick up steam.

Trump's Election Victory and Its Potential Impact on Germany

The potential re-election of Donald Trump as U.S. President presents a new set of challenges for Germany’s already fragile economy. Moritz Schularick, President of the Kiel Institute for the World Economy, stated that Trump’s victory marks a challenging period for Germany, calling it the “most difficult economic moment in the history of the Federal Republic of Germany.”

According to Schularick, Trump's economic policies, particularly his stance on international trade, could add further pressure on the German economy. Trump’s administration has historically been focused on trade protectionism, and his past comments suggest that he may implement tariffs and trade restrictions, which could adversely affect Germany’s export-heavy economy. Schularick emphasizes that Germany faces not only domestic economic challenges but also growing foreign trade and security policy difficulties under a Trump presidency.

The German Economy's Dependence on Exports

Germany’s economy is highly reliant on exports, which account for a significant portion of its GDP. The U.S. is one of Germany’s top trading partners, and its growing importance as a trading partner for Germany is evident. According to data from the German statistics office Destatis, the U.S. became Germany’s second-largest trading partner in 2021, surpassing China in the first half of 2024.

In 2023, nearly 9.9% of German exports were directed to the U.S., making it a crucial market for German businesses. However, this reliance on the U.S. market could prove problematic if Trump follows through on his tariff proposals. Trump has suggested imposing blanket tariffs of 10% to 20% on almost all imports to the U.S., regardless of their origin, which would put German exporters at a significant disadvantage.

Potential Economic Damage from Tariffs

The ifo Institute, a leading economic research organization in Germany, has warned that German exporters could face severe losses if Trump implements his proposed tariffs. The institute estimates that such tariffs could lead to an economic loss of €33 billion for Germany, with German exports to the U.S. potentially dropping by 15%.

This would be especially damaging to key sectors such as automobiles and chemicals, both of which are major exports for Germany. According to Morningstar DBRS, these sectors are highly exposed to potential tariff threats. For example, the German automotive industry, which relies heavily on exports to the U.S., could suffer significant losses if tariffs are implemented on cars and auto parts.

Political and Diplomatic Challenges for Germany

The U.S. election results come at a turbulent time for Germany’s political landscape. In early November 2024, Chancellor Olaf Scholz dismissed Finance Minister Christian Lindner, leading to a breakdown in the ruling coalition. Despite this political turmoil, Scholz and other German political leaders expressed their willingness to engage with Trump and remain reliable partners in international affairs.

However, the re-election of Trump will require Germany and the European Union (EU) to adjust their strategies to face the changing global economic and trade environment. Lindner, in particular, had expressed concerns about the potential impact of Trump’s trade policies on Germany and Europe. He warned that Germany and the EU might need to adopt retaliatory measures if Trump’s administration takes a protectionist approach to international trade.

EU’s Response to Potential U.S. Tariffs

In light of the challenges posed by Trump’s policies, experts suggest that Germany and the EU should consider strengthening their own economic position. Lisandra Flach, Director of the ifo Center for International Economics, emphasized the need for the EU to deepen the integration of its services market and prepare for potential retaliatory actions against U.S. tariffs. By taking these steps, Germany and the EU could mitigate the adverse effects of U.S. protectionism and safeguard their economic interests.

Conclusion

The potential re-election of Donald Trump poses significant risks to the already fragile German economy, especially given the country’s dependence on exports and the looming threat of tariffs. German exporters, particularly in industries like automobiles and chemicals, could face severe losses if Trump follows through on his tariff proposals. Additionally, Germany must navigate both domestic economic challenges and the changing global trade environment under Trump’s leadership. The country’s political instability adds further uncertainty, but Germany must respond strategically by strengthening its position within the EU and preparing for potential retaliatory actions.

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