German Economy Faces Another Year of Stagnation in 2025, Experts Warn

Economic

Summary:

Germany, Europe’s largest economy, is expected to remain stagnant through 2025, according to the German Council of Economic Experts. Weighed down by industrial decline, fiscal constraints, and U.S...

2025 Growth Slashed Amid Persistent Challenges

The German Council of Economic Experts, a key advisory body to the federal government, has downgraded its 2025 GDP growth forecast to near-zero levels, revising its previous estimate of 0.4% growth issued last November. For two consecutive years, Germany has been the only G7 nation not to experience economic growth.

Several structural and geopolitical pressures are contributing to this stagnation. Fiscal austerity measures at home and declining industrial competitiveness—especially in traditional export sectors like automotive and heavy machinery—have left the economy vulnerable. The latest blow comes from Washington: the Trump administration’s aggressive tariff policies now threaten to erode Germany’s export revenues, particularly in the U.S., its largest trading partner.

Exports to the U.S. at Risk Under New Tariff Climate

In 2024, bilateral trade between Germany and the U.S. reached €253 billion ($284 billion), solidifying America’s role as Germany’s top trade partner. However, the Trump administration’s protectionist stance has raised fears in Berlin. German export giants, long dominant in sectors like industrial equipment and luxury cars, now face rising competition from China and are under pressure from new U.S. tariffs.

Monika Schnitzer, Chair of the Council, warned that "Germany's export-driven economy is under immediate threat from both U.S. tariffs and domestic fiscal policy uncertainty." She emphasized the need for a coordinated growth stimulus to prevent prolonged stagnation.

Hope on the Horizon: Fiscal Reform and Infrastructure Investment

Despite the grim near-term outlook, Germany is laying the groundwork for a rebound. In March, the government approved a €500 billion infrastructure fund to be deployed over several years, aiming to stimulate construction, public investment, and equipment upgrades. Crucially, Berlin also adjusted its strict constitutional debt brake to allow military spending exceeding 1% of GDP to bypass the 0.35% budget deficit cap.

These changes are expected to begin bearing fruit in 2026. The Council projects a modest 1.0% GDP expansion next year, driven by public investment and a revival in household consumption. Real disposable income is expected to rise meaningfully, boosting domestic demand—a factor that has long been a weak point in Germany’s economic model.

The coming year will be one of painful adjustment for the German economy. The combined weight of global trade friction, outdated industrial structures, and tight fiscal rules has halted the country’s growth engine. But with strategic investment, reform of spending constraints, and a shift toward bolstering domestic demand, Germany may yet find its way back to sustained growth by 2026.

Source: Reuters

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Gerik

Economic

China–U.S. Trade War

Japan: Export Slowdown Sparks Recession Fears

Japan’s export growth slowed sharply to just 2% in April compared to 4% in March. The slump, driven by declining shipments of core products like automobiles and steel, has pushed the country’s trade balance into a deficit of ¥115.8 billion (around USD 797 million), ending a two-month trade surplus streak.

The primary cause is U.S. tariffs targeting key Japanese exports. Car exports to the U.S. – which account for 29% of Japan’s total auto shipments – dropped 4.8%, while steel exports plunged 29%. Japan’s Ministry of Finance also noted the impact of a stronger yen (147.7 per dollar), which eroded the value of exports and squeezed corporate profits.

Experts warn that continued weakness in exports, combined with sluggish domestic consumption, could drag Japan into a technical recession. Corporations like Toyota and Honda are forecasting billions in profit losses, threatening wage growth – a key factor the Bank of Japan is counting on to justify any shift away from its ultra-loose monetary policy.

South Korea: Tariffs and Political Uncertainty Shake Core Industries

South Korea is faring no better. Preliminary data shows that exports in the first 20 days of May fell 2.4% year-on-year, with shipments to the U.S. plunging 14.6%. Particularly alarming are the declines in autos (-6.3%), auto parts (-10.7%), and steel (-12.1%).

Despite a temporary reduction in U.S. tariffs from 25% to 10% for 90 days starting in April, core sectors remain under pressure. The U.S. accounts for nearly half of South Korea’s $70.8 billion auto exports, making any unresolved tariff dispute a critical risk.

Adding to the challenge is political uncertainty ahead of South Korea’s June 3 presidential election. Candidates hold opposing views on dealing with Washington. While the Democratic Party’s Lee Jae-myung urges caution, rival Kim Moon-soo promises to prioritize a summit with President Trump to resolve the trade impasse.

Although semiconductors remain a bright spot with 17.3% export growth, experts caution the rebound is likely short-term and insufficient to offset broader declines.

Both Japan and South Korea are reeling from the renewed wave of U.S. protectionism. With global supply chains disrupted, local currencies fluctuating, and trade talks in limbo, East Asia’s top exporters are under pressure to diversify markets, strengthen domestic demand, and develop greater resilience to external shocks. As the clock ticks on tariff reprieves and political transitions, the region braces for an uncertain summer.

Source: IBIS

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Glendon

Economic

Forex

A downturn for British firms eased in May despite a darkening picture for manufacturers who cut jobs at one of the fastest rates since the global financial crisis almost 20 years ago, according to a survey published on Thursday.

The S&P Global UK Composite Purchasing Managers' Index (PMI), a gauge of the private sector economy, rose to 49.4 from 48.5 in April, roughly as expected by economists polled by Reuters and moving closer to the 50 threshold for growth.

The services sector which dominates Britain's economy edged back into growth territory, in contrast to factories where the biggest contraction in jobs since May 2020 dragged the manufacturing index down.

Official data published earlier this month showed Britain's economy expanded strongly in the first quarter of 2025.

However, the Bank of England believes the underlying pace of growth is far weaker and Wednesday's PMI chimed with that view, with survey compiler S&P Global warning of the possibility of an economic contraction in the second quarter.

Businesses grew a little cheerier about the outlook, with fewer worries about the impact of higher U.S. trade tariffs. Earlier this month Britain and the United States signed an accord to reduce tariffs and trade barriers in key areas.

U.S. President Donald Trump has also suspended the heaviest of his tariff increases for other countries, easing some of the concerns about their impact on the global economy.

"Although brighter news on tariffs and trade appears to have helped restore some confidence among businesses, sentiment about prospects in the year ahead is still subdued," said Chris Williamson, S&P Global Market Intelligence's chief business economist.

Thursday's survey showed business price pressures weakened noticeably in May which may reassure BoE officials after data on Wednesday showed consumer price inflation jumped last month by more than expected.

The PMI for the services sector rose in May to 50.2 from 49.0, although new orders contracted at the fastest rate since late 2022 - a bad omen for future months.

The manufacturing PMI fell to 45.1 from 45.4 and the jobs index for the sector sank to its lowest level since the onset of the COVID-19 pandemic. Outside of that, it was the lowest since the 2008-09 recession.

April's PMI showed British manufacturers suffered a greater fall in export orders than in any of the 28 countries measured by S&P Global. That index improved in May, but stayed deep in contraction territory.

Source: TradingView

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James Whitman

Economic

German businesses remain cautiously optimistic. After the back-and-forth on US tariffs, German businesses seem to be focusin on the bright side of what could happen under the new German government, rather than fearing the downsides from ongoing uncertainty and trade tensions. This is, at least, the message that the just-released Ifo index seems to convey. Germany's most prominent leading indicator improved again and came in at 87.3 in May, from 86.9 in April. While the current assessment component weakend to 86.1, from 86.4 in April, expecations improved significantly to 88.9, from 87.4, the highest in a year.

Between nearer term risks and longer term opportunities

Taking a step back from high frequency data (and noise), the German economy remains in the middle of two seismic activities: a new government, which seems to lack strong ambition for structural reforms but will have access to unprecedented fiscal space for infrastructure and defence investments, and fundamental shifts in trade and geopolitics, including US tariffs. We think that, at least in the shorter run, the negatives will outweigh the positives. Not that we enjoy negative news but we're currently witnessing several official forecasts for German growth this year converging with our long-held view of yet another year of stagnation. Yesterday’s forecasts from the Germany council of economic advisors was just another example.

Still, not everything is bad. The German economy acutally grew in the first quarter, probably as a result of export frontloading, and industrial data pointed to some cyclical rebound at least before 'Liberation Day'. The tariff extravaganza since the beginning of April, however, will leave clear marks on the German economy. There is the direct impact, as even with the current 90-days-pause, tariffs are still higher than at the start of the year, but also the indirect impact via confidence and still high uncertainty. In the longer term, the announced fiscal stimulus will boost growth in Germany. Implemented in the right way, investment in infrastructure should lead to a cyclical upswing, at least. The caveat, however, remains that the fiscal measures alone – impressive as they might be – will do very little to improve the economy’s competitiveness. Modern infrastructure is essential for one of the world's largest economies, but it doesn't inherently drive innovation, sector transformation, or new growth opportunities. In this regard, we still expect tensions within the government about potential expenditure cuts and some structural reforms as the intended additional spending plans, other than infrastructure and defence, are hard to reconcile with the European fiscal rules.

The frustrating observation, however, is that the analysis of a stagnating economy with the need for investment and structural change is not new. While the discussion has been going on for years now, actual action to change the situation has been limited. In fact, due to the tensions within the last government, the elections and the new government just off the starting blocks, another year of economic policy standstill has passed. Last week, Chancellor Friedrich Merz announced that Germans should feel some positive changes by this summer. We agree that a quick implementation of policy and quick results will be needed but remain sceptical that the summer will bring significant change given the long implementation lags of public investment. Rather than seeing tangible improvements, Germans may find themselves noticing little more than old fax machines still lingering on the streets of Berlin. Public investment and structural changes simply take time.

All in all, today’s Ifo index comes as a positive surprise. Still, we caution against overly hasty optimism. There are currently more unknowns than knowns for the German economy, and we continue to expect another year of stagnation – which would mark the first time ever for Germany to go through three consecutive years without growth.

Source: ING

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Michelle

Economic

Forex

Euro zone business activity unexpectedly slipped back into contraction this month as the bloc's dominant services industry suffered a deeper downturn in demand, although manufacturing showed further signs of stabilisation, a survey showed.

HCOB's preliminary composite euro zone Purchasing Managers' Index, compiled by S&P Global and seen as a good guide to growth, dropped to 49.5 this month from April's 50.4.

May marks its first time below the 50 mark separating growth from contraction this year and confounded expectations in a Reuters poll for a rise to 50.7.

"The euro zone economy just cannot seem to find its footing. Since January, the overall PMI has shown only the slightest hint of growth and in May, the private sector actually slipped into contraction," said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank.

The services PMI dropped to 48.9 from 50.1, its lowest reading since January 2024 and far short of the poll estimate for a rise to 50.3.

As demand fell again optimism among service firms about the year ahead waned further. The business expectations index sank to 54.0 from 55.1, its lowest reading in approaching three years.

But factories showed more signs of recovery with the manufacturing PMI rising to a near three-year high of 49.4 from 49.0, slightly ahead of the 49.3 poll forecast. An index measuring output, which feeds into the composite PMI held steady at April's 51.5.

Some of the improvement in the headline number may have come from factories cutting their prices to support demand. The output prices index fell to a five-month low of 49.0 from 51.3.

"The recovery in manufacturing is broad-based, with encouraging signs coming out of both Germany and France. Further interest rate cuts could provide a boost, and lower oil prices compared to last year are also helping," de la Rubia said.

The European Central Bank cut interest rates for the seventh time in a year last month and markets are currently pricing in another 25 basis point reduction to its deposit rate to 2.00% on June 5.

Source: Reuters

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Gerik

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Forex

Cautious Patience Amid Uncertainty

Bank of Japan policymaker Asahi Noguchi signaled that Japan’s central bank should remain on hold with interest rate hikes amid growing uncertainty from U.S. tariff policies and the prospect of a global economic slowdown. While Japanese super-long bond yields have surged to record highs, Noguchi dismissed the need for emergency BOJ intervention, framing the moves as market-driven and not indicative of dysfunction.

Noguchi's remarks suggest a strong dovish tilt within the BOJ, especially as Tokyo faces intensified trade tensions with Washington. He emphasized that “there’s no point acting on interest rates” during a period of such geopolitical and economic ambiguity, especially when U.S. tariffs are likely to apply "quite strong downward pressure" on Japan’s economy.

No Action Despite Bond Yield Spike

The jump in yields on 20- and 30-year Japanese Government Bonds (JGBs) this week sparked speculation about a potential BOJ response, particularly through additional bond purchases or verbal intervention to cool volatility. However, Noguchi asserted that bond markets occasionally experience sharp movements and that current conditions do not yet warrant central bank interference.

"At times, central banks must take action to stabilize markets. I don't think we're seeing a situation where we need to do so," he said.

This hands-off approach reflects a shift from the BOJ’s prior ultra-loose monetary policy, where yield curve control (YCC) policies were used to cap long-term yields. Since exiting YCC in 2023 and raising rates modestly to 0.5% in January 2025, the BOJ has adopted a more market-driven stance toward bond price discovery.

Tapering and Balance Sheet Plans to Stay Steady

Looking ahead, Noguchi downplayed the possibility of major changes in the BOJ’s current bond tapering schedule, which runs through March 2026. Although he acknowledged the long-term necessity of reducing the central bank’s massive bond holdings, he cautioned that balance sheet normalization should proceed slowly and without destabilizing markets.

“It’s true the BOJ needs to reduce its huge bond holdings... But the priority should be to avoid disrupting markets,” he added.

Next month’s BOJ meeting will include an interim review of tapering progress, but any adjustments are expected to be marginal, keeping the emphasis on financial market continuity.

Tariff-Driven Downside Risks to Growth and Inflation

Noguchi’s cautious tone aligns with the BOJ’s recent downward revision of its economic forecasts, reflecting concern over U.S. tariffs and the global economic slowdown. The BOJ is becoming less confident that wage growth and consumption will be resilient enough to support a sustainable return to its 2% inflation target.

According to a recent Reuters poll, most economists now expect the BOJ to keep rates steady through at least September, with just over half predicting a small hike before the end of 2025. These expectations reflect increasing skepticism about the strength of Japan’s domestic recovery in the face of global headwinds.

Noguchi’s remarks underscore the BOJ’s commitment to patience and market stability. With Japanese yields rising, fiscal policy debates intensifying, and trade friction clouding the macroeconomic horizon, the central bank appears poised to let market forces guide bond prices while holding off on aggressive monetary tightening. The focus now shifts to the BOJ’s June meeting, where policymakers will walk a fine line between credibility and caution.

Source: Reuters

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Gerik

Economic

June Cut ‘Baked In’, But What Comes After?

After executing seven rate cuts in its last eight meetings, the European Central Bank is widely expected to deliver another cut in June, bringing the deposit rate closer to 1.75%. However, increasingly complex dynamics—ranging from a more resilient eurozone economy to emerging inflation risks—are prompting internal debate about the wisdom of extending the easing cycle into the summer.

While inflation appears poised to dip below the 2% target in the short term due to lower energy prices and slowing global demand, longer-term risks are beginning to overshadow the near-term softness.

Emerging Inflation Pressures: Trade Wars and Demographic Drag

The ECB now faces a structurally different landscape. Officials like Isabel Schnabel and Klaas Knot have voiced explicit concerns that global deglobalization, tariff proliferation, and labour market tightness due to demographic shrinkage could anchor medium-term inflation well above 2%.

Schnabel warned that while tariffs might depress demand in the short run—creating a temporary disinflationary pulse—they would ultimately elevate global production costs, especially through fragmented supply chains. This narrative aligns with Klaas Knot’s cautionary stance that initial disinflation may give way to a more stubborn supply-driven inflation, echoing dynamics last seen during the energy crisis.

Signals from Within: Calls for a July Pause

Although the ECB remains officially silent about forward guidance beyond June, dovish signals from figures like France’s François Villeroy de Galhau and Belgium’s Pierre Wunsch hint at internal openness to pausing in July. Off-the-record sources confirm that a distinct internal bloc is coalescing around the idea of a “strategic pause” to allow time to reassess.

The main concern is one of credibility and inflation anchoring. Societe Generale, in its latest note, argued that the ECB must resist overreacting to transient dips in inflation and instead maintain a medium-term policy horizon. A pause could signal the ECB’s resolve to avoid falling back into a deflationary trap, particularly if expectations about inflation volatility remain within control.

Market Pricing: One Cut, Then Wait

Markets have already adjusted. Futures pricing indicates a near-certain June cut, followed by a pause and possibly one final cut by year-end. This moderation reflects improved eurozone growth indicators and a stabilization of U.S.–China trade tensions, which had been dragging down global demand.

Still, the easing bias remains embedded. As TS Lombard notes, the ECB continues to lean dovish due to the drag of U.S. tariffs on euro area exports, a fragile job market under pressure from weak corporate profits, and political pressure to maintain accommodative policy amid fiscal uncertainty across member states.

A Strategic Crossroads for the ECB

The ECB finds itself in a delicate position. It must walk the tightrope between supporting growth in an uncertain trade environment and avoiding policy overreach that could reignite inflation in the medium term. With the June rate cut already priced in, attention will now turn to how ECB President Christine Lagarde communicates the Governing Council’s longer-term thinking.

The critical question for July: Is this the start of a pause—or merely a pause before further cuts? Either way, the summer of 2025 will test the ECB’s commitment to data-dependence and its ability to navigate a global economy reshaped by tariffs, fragmentation, and fiscal fragility.