US tariffs of 30% would dent, not stop, German growth, says IMK

The IMK institute warns that President Trump's proposed 30% tariffs on EU imports, effective August 1, could reduce German economic growth by approximately 0.25 percentage points this year and next, potentially leading to zero growth in Germany this year compared to previous recovery forecasts. This trade tension is already impacting export-reliant sectors, with a VDMA survey revealing over half of German engineering companies do not expect nominal sales growth this year, pushing expected sales recovery for many firms into 2026, despite some firms still identifying favorable opportunities in North America.

Analysis

The German economy faces a significant risk of stagnation, with the IMK institute forecasting zero growth for the current year if the U.S. imposes its threatened 30% tariffs on EU imports. This represents a material downward revision, as the tariffs are projected to cut approximately 0.25 percentage points from growth this year and next, lowering the 2025 forecast to 1.2%. The impact is already being priced in by Germany's critical export-reliant engineering sector, where a VDMA survey indicates that over half of companies expect no nominal sales growth this year, and 30% anticipate a decline. The outlook suggests a prolonged period of pressure, with a majority of these firms not expecting a return to sales growth until 2026. Although the IMK suggests that an offensive in public investment could mitigate these risks, the heavy reliance on the U.S. market, which until last year was Germany's largest export destination with a nearly 10% share, underscores the vulnerability of the German corporate sector to this specific trade policy threat.

Key Decisions for Investors

• Investors should review and potentially reduce exposure to German equities, particularly within the export-heavy industrial and engineering sectors, given the direct threat of tariffs and negative corporate sales outlooks.
• Monitor upcoming German fiscal policy announcements, as the IMK institute suggests that a significant public investment initiative could serve as a key mitigating factor against the projected economic downturn.
• Given that the tariff impact is conditional on trade negotiations, positions in European assets should be managed with a close watch on any developments in U.S.-EU trade talks, which will act as a primary catalyst for market sentiment.