Financial analysis: The ongoing trade war remains a constant source of anxiety for investors, persisting nonetheless
The global economic landscape is causing mixed impacts on Germany's export sector and overall economy. Despite a modest recovery in Germany's exports in mid-2025, the country's economy contracted by 0.3% quarter-on-quarter in Q2, a downward revision from the initial estimate.
The exports rebound was driven by stronger demand within the EU and growth in shipments to Russia and China. However, exports to the US have declined for three consecutive months, likely due to evolving US tariff measures.
This contraction reflects weak investment, negative net exports, and sluggish performance in construction and manufacturing sectors. Consumption showed only marginal improvement, but the stable labor market is helping limit the downturn. However, a falling saving rate suggests consumption gains may not sustain for long.
Structural challenges exacerbate this situation, as Germany faces pressures from EU-US trade tariffs, energy transition costs, and a fragile industrial base. These factors have not only impacted exports but also broader economic activity.
Germany's export competitiveness and investment levels are key to overcoming these challenges. Ongoing initiatives like the "Made for Germany" alliance pledge substantial investments aimed at revitalizing the economy through to 2028.
The global economic situation is causing cautious investor sentiment. Fund managers are increasing hedging activities and building up cash, indicating a lack of pent-up buying demand or an excessively high investment ratio. The German economy is at risk of entering an economic downturn, as indicated by the ifo business climate index.
The poor earnings quality of German companies is not expected to improve in the short term. The persistent weakness of the euro is likely contributing to the earnings of German companies.
In the midst of these challenges, the trade war between the US and China could heat up significantly if China stops exporting rare earths to US technology and defense companies. May's new Brexit proposal finds no support within her own party, and a fourth vote on her latest Brexit deal in the week beginning June 3 is highly uncertain.
In Japan, weak data on retail sales, industrial production, and inflation are leading to continued monetary policy offensive. The insolvency of British Steel is attributed to Brexit uncertainty. A new Prime Minister, possibly Boris Johnson, will seek to renegotiate the existing Brexit deal with the EU at short notice.
In the Eurozone, the upward trend in Sentix economic expectations for the next six months is likely to take a breather. Inflation is expected to decline again in May. The service sector in Germany is feeling the heat, while the construction sector has shown some recovery. Theresa May's resignation is expected on June 10.
Despite these challenges, stable retail sales and a generally positive GfK consumer confidence index indicate a robust domestic economy in Germany. The manufacturing sector, however, has gloomy expectations. The London Parliament has rejected a No Deal Brexit, and the European elections could result in a tougher stance towards London from Brussels.
[1] Source: BBC News [2] Source: Reuters [3] Source: Deutsche Welle [4] Source: Financial Times
- The contraction in Germany's economy, driven by factors such as weak investment, sluggish manufacturing, and negative net exports, is causing concern among global financial circles, as indicated by the increase in hedging activities and the accumulation of cash by fund managers.
- Germany's economy, facing challenges from factors like EU-US trade tariffs, energy transition costs, and a fragile industrial base, is being further impacted by external events such as the potential trade war between the US and China, Brexit uncertainty in the UK, and the insolvency of British Steel.
