Germany ZEW Sentiment Plunges 18% Amid US Tariffs and Weak Q2 Growth

Investor sentiment in Germany has plunged sharply in August following the EU–US trade deal, according to the latest ZEW institute data. The ZEW Indicator of Economic Sentiment dropped to 34.7 from 52.7 in July, marking one of the most significant declines in recent months. This figure fell below the 39.5 level forecast by Bloomberg-poll analysts, indicating a stronger-than-expected negative market response [1][2][3]. The decline reflects heightened concerns among investors regarding the competitiveness of key German industries, including the chemical, pharmaceutical, automotive, and mechanical engineering sectors [3].

Achim Wambach, President of the ZEW institute, attributed the drop to the 15% US tariffs on EU goods and the weak second-quarter economic performance. Germany’s GDP contracted by 0.1% in the second quarter, reversing a 0.3% gain in the first quarter. The current situation indicator also deteriorated, falling to -68.6, signaling a worsening assessment of the present economic conditions [3]. Analysts like Valentin Jansen of Nord LB have echoed these concerns, stating that the tariffs could hinder Germany’s economic recovery and strain its industries. Jansen emphasized that the trade deal is not a sustainable solution between the EU and the US, and that long-term economic challenges remain unresolved [3].

The trade agreement, announced in July, included a U.S. tariff of 15% on EU goods—half the 30% threat previously posed by former U.S. President Donald Trump. In exchange, the EU committed to investing $600 billion in the U.S. by 2029 and purchasing $750 billion in U.S. energy exports by 2028. Despite these concessions, the deal failed to reassure German investors, who fear higher costs and reduced competitiveness for German exports [3].

The impact of the trade deal was not limited to Germany. The eurozone also experienced a decline in economic confidence, with the economic sentiment index falling to 25.1 in August, a 11-point drop from the previous month [3]. The eurozone’s overall performance was slightly better than Germany’s, with GDP growth easing to 0.1% in the second quarter from 0.6% in the first [3]. The fall in sentiment was reflected in financial markets, with the euro sliding following the weak ZEW data [4]. Investors are now closely watching for policy responses from European and German authorities to address the growing economic uncertainty [3].

Meanwhile, the trade deal has also started to affect US consumers as companies pass on higher import costs. Core CPI increased 0.2% in July after a 0.3% gain in June. The U.S. dollar weakened against the euro, and the annual CPI rate remained at 2.7%. While lower gasoline prices have provided some relief, economists expect the impact of tariffs to persist in areas such as home goods and recreational products [3].

With the Bundesbank forecasting zero growth for Germany this year and factory orders declining for a second consecutive month, the economic outlook remains bleak. Chancellor Friedrich Merz’s approval is also slipping, with many doubting his ability to navigate the ongoing crisis [3]. Analysts warn that without clear economic stimulus measures and a more favorable trade environment, Germany could face another year of contraction.