US President Donald Trump stopped short of imposing new tariffs in his initial executive orders but unveiled the External Revenue Service, a new agency tasked with collecting tariffs and duties in the coming months.
Financial experts are growing more cautious about Germany’s economic outlook, as the spectre of a second consecutive year of recession and renewed trade tensions under the new US administration cast a shadow over expectations.
The ZEW Economic Sentiment Index for Germany fell to 10.3 points in January, down from 15.7 in December and missing market forecasts of 15.3. While not an outright collapse, the decline underscores persistent concerns about weak private consumption, sluggish construction activity, and mounting inflationary pressures.
A slight bright spot emerged in the assessment of Germany’s current economic situation, with the sub-index rising by 2.7 points to -90.4. Though still deeply negative, the improvement suggests that, while economic sentiment is deteriorating, conditions on the ground have not worsened as sharply as some had feared.
While German sentiment weakened, financial experts remain more upbeat about the broader eurozone. The ZEW Economic Sentiment Index for the region edged up by 1.0 point to 18.0 in January, signalling relative resilience. The assessment of the eurozone’s current economic situation remained stable, with the indicator inching up to -53.8 points.
Recession fears and political uncertainty weigh on outlook
ZEW President Achim Wambach pointed to Germany’s economic stagnation and increasing geopolitical risks as key factors behind the decline in sentiment.
“The second consecutive year of recession caused economic expectations in Germany to fall. The year started with a noticeable decline in the corresponding indicator. This could be, among others, due to the recently released negative GDP growth figures and increasing inflationary pressure,” Wambach noted.
The economic outlook is also clouded by uncertainty over US trade policy following Donald Trump’s return to the White House. During his campaign, Trump pledged to impose tariffs of up to 10% or 20% on all imports, including those from Europe.
While his first round of executive orders, signed on Monday, did not include new tariffs, his administration has established an “External Revenue Service” to oversee tariff collection, stoking fears of a more protectionist stance in the months ahead.
“Political uncertainty is also playing a role, driven by a potentially difficult coalition-building process in Germany and the unpredictability of the economic policy pursued by the new Trump administration”, Wambach added.
At home, Germany’s political landscape remains unsettled. A snap federal election is scheduled for 23 February after the collapse of Chancellor Olaf Scholz’s three-party coalition in November.
Recent polls put the centre-right CDU/CSU in the lead with 31% support, followed by the far-right AfD at 21%. Scholz’s SPD has slipped to 16%, with the Greens at 14% and the newly formed Sahra Wagenknecht Alliance (BSW) polling at 6%. With smaller parties such as the FDP and Die Linke hovering near the 5% Bundestag entry threshold, the outcome remains highly uncertain.
Markets tread carefully as Trump policy takes shape
European markets showed little reaction on Tuesday as investors took stock of Trump’s first policy moves.
The DAX index traded flat at 20,990 points, hovering near record highs. Sartorius, Siemens Healthineers, and Rheinmetall led gains, up 2.1%, 2%, and 1%, respectively, while Commerzbank, Fresenius Medical Care, and RWE slipped 1.7%, 1.5%, and 1.2%.
The Euro STOXX 50 index also held steady, with LVMH rising 2% while Banco Santander lagged, down 1.7%.
In currency markets, the euro fell 0.6% to 1.0357, paring Monday’s 1.4% gain, which had been driven by relief over the absence of immediate tariff measures in Trump’s initial executive orders.
Looking ahead, the European Central Bank is widely expected to cut interest rates by 25 basis points to 2.75% at its policy meeting next Thursday, a move that could further weigh on the euro.
