Germany’s economy shrinks again amid tariff tensions

Germany’s economy is tanking—again. For the second year in a row, Europe’s largest economy is officially in decline, shrinking by 0.2% in 2024 after a 0.3% contraction in 2023. This is the first time since 2003 that Germany has suffered back-to-back GDP drops.

This isn’t just a bad year. It’s a bad trend. Germany’s output has been flat since the end of 2019. Meanwhile, the U.S. has surged ahead, growing its economy by 11%. The eurozone, too, has managed a 5% expansion.

For Germany, however, the hits keep coming: high energy prices, rising interest rates, sluggish demand, and fierce competition in global markets are throttling its industries. As voters head to the polls in February, these numbers are impossible to ignore.

Energy, trade wars, and industry failings cripple growth

Germany didn’t get here overnight. It’s been a long, slow grind since 2018 when Donald Trump’s trade war threw global supply chains into chaos. His tariffs on EU imports—including German goods—set the tone of economic headwinds for years.

At the same time, Chinese manufacturers stepped up and began dominating sectors Germany once ruled, like robotics and advanced manufacturing. Then came the energy crisis. Russia’s full-scale invasion of Ukraine in 2022 sent natural gas prices soaring, hitting Germany harder than most.

This was a country that built its industrial dominance on cheap Russian energy. The spike in costs left companies scrambling, and 2023’s inflation added more pain for consumers and businesses alike.

Industrial production in Germany is now 15% below its 2017 peak, and no sector illustrates this collapse better than Germany’s once-iconic auto industry. For decades, carmakers like Volkswagen defined German engineering excellence.

Now they’re lagging behind U.S. and Chinese competitors in the race to produce electric vehicles. Volkswagen, Bosch, and Schaeffler are cutting jobs because they couldn’t pivot fast enough to meet the surging demand for EVs.

Meanwhile, Intel has postponed plans to build a chip factory in Germany, and a proposed merger between Commerzbank and Italy’s UniCredit is on ice thanks to government resistance. It’s a mess, and there’s no quick fix.

Election tensions and looming U.S. tariffs fuel uncertainty

There’s also the political nightmare in the European country. Germany’s struggling economy is now a central issue in the upcoming elections, with voters demanding answers from a fractured political landscape.

The center-right Christian Democrats, led by Friedrich Merz, are hoping to take control. Merz has hinted at loosening Germany’s tight fiscal rules, which currently limit budget deficits. Economists say this could pave the way for more public investment, particularly in defense and infrastructure. He’s also pushing for lower corporate taxes to attract businesses.

But it’s not just domestic policy that has everyone on edge. The incoming Trump administration has Germany’s exporters bracing for fresh tariffs. Goldman Sachs estimates these could shave off as much as 1.2 percentage points from Germany’s GDP.

That’s a huge blow for an economy that’s already limping. The prospect of higher tariffs is especially alarming for manufacturers who depend on exporting high-end machinery, cars, and other goods to the U.S.

The European Central Bank might offer a glimmer of hope with lower interest rates expected this year, which could make borrowing cheaper and spur investment. But even that feels like a band-aid on a gaping wound.

Some analysts are clinging to the idea that Trump’s trade policies could inadvertently make the U.S. dollar stronger, which might help German exports look more competitive. It’s a long shot though.

And then there’s the far-right wildcard. Polls show no party is close to a majority, meaning coalition-building will be messy. Rising support for the far-right Alternative for Germany (AfD) party could make things worse.

Elon Musk, Trump’s best friend, has thrown his weight behind the AfD. The possibility of far-right influence in parliament is raising alarms across Europe. One thing is clear though, this ain’t no ‘sick man of Europe’ anymore.

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