Geopolitical tensions weigh on the industry outlook

„The outlook for a moderate recovery in German industry is becoming increasingly clouded by the conflict in the Middle East and the tariff threats announced by U.S. President Donald Trump. After industrial production had declined sharply in recent years, it has stabilized in recent months, albeit with considerable month-to-month volatility. Prospects for a gradual recovery were supported not only by expansionary fiscal policy – most recently reflected in large defense-related orders – but also by signs of stabilization in export activity. Yet external trade now risks facing another setback as a result of the conflict in the Middle East and the prospect of additional U.S. tariffs.

Germany’s export sector has come under considerable pressure in recent years amid a deterioration in industrial competitiveness. Although the downward momentum in exports already eased last year, exports to the United States remained a major drag on overall export performance in 2025, reflecting both higher tariffs and the marked depreciation of the U.S. dollar. Outside the U.S. market, export activity developed somewhat more favorably again last year, while total exports even increased again in the first quarter of the current year.

The tariff increases on automobile imports from the European Union threatened by President Donald Trump would weigh noticeably on German industry – not only because the automotive sector continues to account for a substantial share of manufacturing output and the United States remains an important export market despite recently declining exports. Tariffs imposed selectively on imports from the European Union would likely have considerably stronger negative effects than broad-based tariff increases, as they would weaken the competitive position of European producers relative to suppliers from third countries. However, whether and to what extent new tariffs will actually be implemented remains unclear at present. Even the announcement of possible new tariffs is nevertheless likely to increase trade policy uncertainty and thereby weigh on economic activity.

Negative effects of the conflict in the Middle East on industrial production are likely to arise primarily from weaker export opportunities in commodity-importing economies, where demand is dampened by higher commodity prices. These negative effects are, however, partly offset by stronger demand in commodity-exporting economies benefiting from higher commodity prices – provided that the conflict does not itself significantly impair their export activity – as well as by the comparatively high energy efficiency of German firms. Risks would increase in particular if commodity prices were to remain significantly elevated for a prolonged period or if supply bottlenecks intensified. More recently, firms have increasingly reported disruptions to supply chains.“