In a significant move, US President Donald Trump refrained from introducing additional tariffs in his initial executive orders. However, he did announce the creation of the External Revenue Service, a new agency designed to handle the collection of tariffs and duties in the near future.
As the new US administration takes charge, financial analysts express growing concerns regarding Germany’s economic prospects. The looming possibility of a second consecutive year of recession, coupled with renewed trade tensions, has cast a shadow over economic expectations.
The ZEW Economic Sentiment Index for Germany showed a decline to 10.3 points in January, down from 15.7 in December, falling short of market predictions of 15.3. Although not a drastic collapse, this downturn reveals ongoing worries about weak private consumption, sluggish construction activity, and rising inflationary pressures.
On a slightly positive note, there was a minor uptick in the evaluation of Germany’s current economic state, with the sub-index increasing by 2.7 points to -90.4. While still in negative territory, this improvement indicates that, despite deteriorating economic sentiment, the actual conditions may not be as dire as previously feared.
Despite the weakening sentiment in Germany, experts remain optimistic about the broader eurozone. The ZEW Economic Sentiment Index for the region crept up by 1.0 point to 18.0 in January, suggesting some degree of resilience. The assessment of the eurozone’s current economic situation held steady, inching up to -53.8 points.
Recession Fears and Political Uncertainty Challenge Economic Outlook
ZEW President Achim Wambach identified economic stagnation in Germany and heightened geopolitical risks as central to the dip in sentiment. “The expectation of a second consecutive year of recession impacted economic forecasts in Germany. The year began with a noticeable slide in the relevant indicator, influenced by recently released negative GDP growth figures and rising inflation,” Wambach remarked.
Moreover, the uncertainty surrounding US trade policy following Donald Trump’s ascent to the presidency further clouds the economic outlook. Throughout his campaign, Trump had committed to imposing tariffs ranging from 10% to 20% on all imports, including those from Europe.
Although Trump’s initial executive orders, signed recently, did not implement new tariffs, the establishment of the External Revenue Service has ignited concerns about a potential shift towards protectionism in the coming months.
“Political uncertainty also looms large, fueled by a challenging coalition-building process in Germany and the unpredictable economic policies from the new Trump administration,” Wambach added.
Domestically, Germany’s political scene remains unsettled, with a snap federal election set for February 23, following the collapse of Chancellor Olaf Scholz’s three-party coalition in November. Current polls reveal the center-right CDU/CSU leading with 31% support, while the far-right AfD trails at 21%. Scholz’s SPD has dipped to 16%, the Greens sit at 14%, and the newly formed Sahra Wagenknecht Alliance (BSW) registers at 6%. With smaller parties like the FDP and Die Linke close to the 5% threshold to enter the Bundestag, the election outcome remains unpredictable.
Markets Remain Cautious as Trump’s Policies Emerge
European markets showcased minimal movement as investors evaluated Trump’s inaugural policy actions. The DAX index stabilized at 20,990 points, remaining near record highs. Notable performers included Sartorius, Siemens Healthineers, and Rheinmetall, rising by 2.1%, 2%, and 1% respectively, while Commerzbank, Fresenius Medical Care, and RWE fell by 1.7%, 1.5%, and 1.2%.
The Euro STOXX 50 index similarly remained steady, with LVMH increasing by 2%, whereas Banco Santander saw a decrease of 1.7%.
In foreign exchange markets, the euro dropped by 0.6% to 1.0357, correcting Monday’s gain of 1.4%, which had been driven by relief over the absence of immediate tariff impositions in Trump’s initial executive orders.
Looking ahead, the European Central Bank is broadly anticipated to cut interest rates by 25 basis points to 2.75% during its upcoming policy meeting next Thursday, potentially exerting further downward pressure on the euro.
Photo credit & article inspired by: Euronews
