US Tariffs: A Shock to Germany's Economy - The Rollercoaster Ride of Industrial Orders
Strengthening industrial orders due to US tariffs - U.S. Tariff Favoritism Fuels Industrial Growth: Robust Increase in Orders
Germany's industrial sector experienced a rollercoaster ride in recent months, with March 2021 showing a surprising surge in industrial orders. The Federal Statistical Office reported a 3.6 percent increase, almost three times more than initially anticipated, thanks to US President Donald Trump's aggressive tariff policies.
The Ministry of Economics attributed the order boost partly to anticipation effects in response to announced US tariff hikes. However, a strong increase in demand from neighboring European countries also played a significant role. Despite trade policy uncertainty, the industry's first-quarter performance was relatively robust, according to the ministry.
The automotive and machinery sectors saw significant order increases, driven by strong foreign demand, particularly from the Eurozone. Orders for electrical equipment manufacturers and the pharmaceutical industry surged by 14.5 percent and 17.3 percent, respectively.
In stark contrast, industrial orders had stagnated in February and declined significantly in January. The industry's weakness is a major contributing factor to Germany's stagnant economy for the past three years.
Economists looked at the numbers with cautious optimism. Commerzbank's chief economist, Jörg Krämer, called it a strong increase in orders but warned against expecting a swift economic recovery. He highlighted that companies are still rattled by US tariff shock, and the new federal government's economic policy revival is less likely due to a narrow majority.
Michael Herzum from Union Investment was skeptical, commenting, "One swallow doesn't make a summer." Although the industry appears to have withstood the high tariff uncertainty, this recovery may be short-lived, given the impact of unpredictable US economic policies.
Behind the scenes, the long-term impact of these US tariffs on Germany's economy is:
- Threat to Exports and Industrial Orders: Tariffs on crucial exports, such as automotive, pharmaceuticals, steel, and aluminum, pose significant risks to the volume and profitability of industrial orders.
- Supply Chain Shifts: German companies are increasingly reconfiguring supply chains and production locations, particularly in the automotive sector, to circumvent tariffs. This restructuring involves substantial costs and could lead to a reduction in Germany's trade surplus with the US.
- Long-Term Growth Prospects: US protectionism could result in a decline of up to 0.4% in Germany's GDP, with models indicating that persistent tariffs and costly supply chain adjustments could lead to even more significant long-term growth contraction.
- Sectoral Risks and Broader Consequences: The automotive and pharmaceutical sectors, responsible for nearly half of Germany's trade surplus with the US, face the highest tariff risks. These sectors could face price increases, lower demand, and accelerated supply chain reshoring, impacting industrial orders.
In conclusion, while US tariffs may have provided a temporary boost to Germany's industrial orders, the long-term implications are severe. The economy is at risk of lower exports, declining industrial orders, and reduced long-term growth due to persistent uncertainty and supply chain realignment. Fiscal measures and sectoral agility may help mitigate some of these negative effects, but they cannot fully offset them.
- The threat of US tariffs on exports like automotive, pharmaceuticals, steel, and aluminum poses significant risks to the volume and profitability of industrial orders in Germany.
- In response to tariffs, German companies are reconfiguring supply chains and production locations, especially in the automotive sector, which may lead to a reduction in Germany's trade surplus with the US.
- Economists predict a decline of up to 0.4% in Germany's GDP due to US protectionism, with persistent tariffs and costly supply chain adjustments potentially leading to even more significant long-term growth contraction.
- Sectors like the automotive and pharmaceutical industries, responsible for nearly half of Germany's trade surplus with the US, face the highest tariff risks and could face price increases, lower demand, and accelerated supply chain reshoring, impacting industrial orders.
