Gentle upswing and geopolitical storms

Economic recovery is a tender plant. One that has had to endure a lot since the beginning of the year. Initially, geopolitical uncertainty increased when the US reasserted claims to Greenland, resulting in new tariff chaos. At the same time, concerns about the sustainability of the AI rally in equity markets grew, strengthening the euro and creating fresh headwinds for export-oriented economies. Finally, the Supreme Court in the USA declared the punitive tariffs that Trump had imposed last year on the basis of the "International Emergency Economic Power Act" (IEEPA) illegal, whereupon the president announced tariffs on another basis.

At the end of February, all this quickly faded into the background when the next level of escalation was reached in the Middle East conflict. Even while indirect talks on Iran's nuclear program were underway, President Trump repeatedly threatened to take military action against Iran if no agreement was reached. And although a cautiously optimistic conclusion was drawn after the third round of talks, there was a joint attack on Iran by Israel and the USA.

In addition to the immeasurable humanitarian consequences, this attack also has economic implications. And they hit Germany at an inopportune time. After two years of recession, the German economy will finally grow again in 2025 – at 0.2 percent, far from the economic miracle, but still a step out of the growth crisis into a, at least, cyclical recovery. And this is largely based on the better prospects in industry, driven by more investment in infrastructure and defense. Fuller order books and falling inventories, as well as better sentiment in the German boardrooms – everything recently indicated that the effects of the German fiscal package would finally become visible in 2026 before they were to take full effect in the coming year.

With the war in the Middle East, energy prices rose sharply, eerily beautifully illustrated on the gas station boards. With memories of the effects of the energy price shock in the wake of the war of aggression on Ukraine still very intact, both inflation concerns and interest rate hike expectations quickly returned.

Nevertheless, we should not write off the economic recovery in Germany. Although higher energy prices are quickly visible and noticeable at the gas station, they do not reach industry so quickly.There is currently hope that the economic impact of the conflict will be limited in both time and scope. This would also mean that the ECB would not have to raise interest rates this year – or face stagflation.

The first quarter is likely to be somewhat weaker than implied by leading indicators, but the tender little plant of recovery could hold its own in the further course of the year. However, geopolitical tensions, trade uncertainty and foreign policy showdowns remain permanent risk factors. In order to be able to meet these with the greatest possible resilience, more is needed than the cyclical upswing – because it remains vulnerable. To weather the geopolitical storms, structural reforms are essential for greater competitiveness and resilience.