German Economic Confidence Slides as EU-US Trade Deal Fails to Deliver

Germany’s Economic Outlook Weakens in August

Germany’s sentiment toward the economy slipped noticeably in August, as shown by a steep drop in the ZEW indicator to 34.7. Analysts were sharply disappointed by the EU‑US trade agreement, which has been a focal point for discussions on the country’s future economic stability.

Industry Impact Highlights

• Automotive sector: Key manufacturers recorded a marked decline in production numbers and investment plans.
• Chemical industry: Firms in this field reported reduced demand forecasts and tightened supply chains.
• Other lines of business: Several ancillary industries—such as machinery and logistics—faced renewed uncertainty amid shifting regulatory expectations.

Broader Eurozone Trends

The downturn in Germany’s sentiment signals a shift in the broader eurozone outlook, with economic optimism weakening across member states and prompting policy analysts to reassess growth projections for the region.

Germany’s Economic Mood Takes a Sharp Lurch in August

The national market confidence gauge, set by the ZEW Institute, dipped dramatically, ending a three‑month run of improvement and throwing fresh skepticism to Germany’s growth prospects.

Why the Sentiment Fell

• EU–US Trade Deal Shock: The controversial agreement has left major manufacturing sectors wary of higher tariff hits, rattling expectations.
• Weak Second‑Quarter Performance: Key economic indicators from the latest quarter show a disappointing slowdown, further dampening optimism.
• Sector‑Specific Strains: Industries such as chemicals, pharmaceuticals, mechanical engineering, metals, and automotive are noted to feel the impact most acutely.

Key ZEW Figures

• Sentiment Index: Slid 18 points to 34.7 (anticipated closer to 40).
• Current Conditions Gauge: Lowered to –68.6 from –59.5, failing the –60 forecast.
• July vs. August: July peaked at the highest level since February 2022; August has reversed part of that recovery.

“Financial market experts are disappointed by the announced EU–US trade deal,” said ZEW president, Professor Achim Wambach.

Broader Eurozone Trends

• EWZ expectations index for the bloc dropped 11 points to 25.1.
• Current conditions gauge fell 7 points to –31.2.
• Initial optimism about regional resilience is being reevaluated as growth forecasts for the remaining year are trimmed.

Looking Ahead

Analysts anticipate a tighter outlook for Germany’s major industrial sectors, with an emphasis on the chemicals and pharmaceutical industries. Improved resilience in the eurozone faces challenges as the economic backdrop remains uncertain.

Unequal trade deal weighs on sentiment

Last‑Minute Accord Reaches a 15% EU Tariff, Avoiding a 30% U.S. Tax Surge

On 27 July, just days before the United States was about to impose a 30 % tariff on European Union goods, the European Commission’s President Ursula von der Leyen and U.S. President Donald Trump struck a rapid deal.

Key Elements of the Agreement

• Basic 15 % tariff set on all EU exports.
• Higher levies of 50 % applied to steel, aluminium, and copper.*
• Exemption granted to aircraft and aircraft components.
• The EU committed to buying $750 billion (€685 billion) in U.S. energy exports over a three‑year period.

*, The elevated rates target U.S. strategic interests and are calculated to be manageable within the broader EU budget.

Political and Economic Reactions

Many analysts viewed the deal as favoring Washington’s politics, reducing the U.S. trade deficit with the EU.

Oliver Rakau, chief German economist at Oxford Economics, described the agreement as “a one‑sided trade deal that diminishes the U.S. deficit.”
Isabelle Mateos y Lago of BNP Paribas remarked that the deal sits “on the higher end of realistic outcomes” and noted that the effective tariff rate has grown tenfold since the year started. She added that the shock is manageable because U.S. imports represent less than 3 % of EU GDP.
Bill Diviney from ABN AMRO argued that the agreement reflected Europe’s weakened bargaining capacity, citing economic stagnation and worsening inflation. He cautioned that Berlin and France were unwilling to endure economic pain for a potentially better outcome, and highlighted the EU’s reliance on the U.S. for both security and energy imports.

Implications for the Future

While the tariff structure aims to protect U.S. strategic materials, the EU’s pledge to purchase energy aligns with both parties’ long‑term interests. Economists anticipate gradual adjustments as markets adapt to these new trade terms.

Markets cautious as US inflation data looms

EUROPEAN AND AMERICAN MARKETS: SILENT STABILITY FOLLOWING ZEW UPDATE

German DAX Holds Firm After ZEW Release

The latest ZEW business‑sentiment index did little to stir the market. The DAX hovered close to 24,050 points, indicating a largely undisturbed reaction from investors.

Euro Settles Slightly Lower

In parallel, the euro slipped modestly, trading at $1.1600—a 0.1 percent fall—reflecting a cautious tone in currency flows.

Investor Attention Shifts to U.S. Inflation Data

Market focus has turned to the upcoming Consumer Price Index for July. Analysts anticipate a year‑on‑year rise to 2.9%, up from 2.7% recorded in June.

Tariff Impact on Consumer Prices

Observers are now watching for early signs that newly imposed tariffs might begin to filter through to final consumer prices.

Rate‑Cut Probability in Money Markets

Money markets currently price an 85 % likelihood that the Federal Reserve will cut rates by 25 basis points at its next meeting, spurred by evidence of a cooling labor market.

• ZEW release: market largely unchanged
• DAX near 24,050 points
• Euro fell 0.1% to $1.1600
• US CPI July expected 2.9% YoY
• Tariff-impact concerns for consumer prices
• Federal Reserve 85% chance of 25bp rate cut