General Economic and Industry-Specific Conditions

 

US tariff policy overshadows global economy – subdued momentum

In the first half of 2025, the global economy was impacted by the restrictive and unpredictable US trade policy and the temporary escalation of the crisis in the Middle East. Monetary policy was inconsistent in this environment. The US Federal Reserve kept its interest rates stable, while the ECB continued its easing measures in the eurozone. After the US economy initially experienced a tailwind in anticipation of high tariffs, the trend flattened out noticeably in the second quarter of 2025. With slightly lower capacity utilization, industrial production rose only moderately (Q1 2025: +4.3 %; Q2 2025: +1.1 %). Nevertheless, gross domestic product (GDP) rose by an annualized 3.0% in the second quarter of 2025 (Q1 2025: -0.5%), which  represents a typical annual rate of +2.0% (Q1: +2.0%). The Chinese government and central bank have provided domestic stimulus to cushion the pressure on exports. Industry was able to increase production by 6.4% by the end of June 2025. Capacity utilization also improved slightly (Q1 2025: 74.1%, +0.5 percentage points). In total, China’s economy grew by 5.3% in the first half of 2025 (Q1 2025: +5.4%; Q2 2025: +5.2%). Europe has picked up slightly despite the headwinds from trade policy, flattening inflation, and falling interest rates. In addition to higher private consumption, construction activity also stabilized in the eurozone. Industrial production also increased (Q1 2025: +1.5 %; April: +0.2 %; May +3.7 %). However, capacity utilization was even lower (Q2 2025: 77.8%; -1.0 percentage points). In total, Eurozone GDP growth was only slightly positive at +1.4% in the second quarter of 2025 (Q1 2025: +1.5 %).

 

German economy remains at a low point amid weak industrial activity

Economic momentum in Germany remained subdued in the first half of 2025. Anticipatory effects in the wake of the looming US trade conflict, particularly in March, led to a temporary production boost and brisk exports – especially of vehicles and vehicle parts – to the US. However, the overall economic trend in Germany remained weak compared to the previous year despite the upturn in private consumer spending. The decline in investments, which has now been ongoing for over two years, initially continued in both equipment and construction. Although industrial production picked up slightly in spring (Q1 2025: -2.3%; April: -2.5%; May: +1.4%), capacity utilization in industry deteriorated significantly again within a year (Q2 2025: 77.7%; -2.9 percentage points). GDP did not grow in the second quarter of 2025 either (Q2 2025: +0.0%, Q1 2025: revised +0.0%), although economic output adjusted for seasonal and calendar effects rose slightly (Q2 2025: +0.4%, Q1 2025: +0.3%). Despite this slight calculated boost, the German economy remained weak in the first half of the year.

 

Investment restraint continues to paralyze mechanical engineering

The global industrial economy has gained momentum so far this year, but not evenly. The main factors were regional differences in economic momentum and the disruptive US trade policy. In addition, the competitive environment has now shifted noticeably. Asian industry, for example, gained strength through subsidies and technological leaps. In contrast, competitiveness in Europe – especially in Germany – was impacted by structural weaknesses, high energy costs and the appreciation of the euro. Global industrial production (excluding construction) grew by 3.1% in the first five months (full year 2024: +1.7%). However, the actual momentum is overstated, especially as the US tariff announcements had triggered significant anticipatory effects. Industrial production in emerging markets rose by 4.5% by the end of May 2025, compared to just 1.5% in industrialized countries. The propensity of companies to invest remained subdued due to low capacity utilization and high risks. In this environment, machine production in the US came to an abrupt halt after a surge at the start of the year (Q1 2025: +6.6 %; Q2 2025: +0.1 %). Capital goods production in the eurozone contracted by 1.3% in the first quarter of 2025, with March seeing a slight increase for the first time. Production in the German mechanical engineering sector remained weak despite a very low prior-year base (Q1 2025: -4.0%; April: -4.1%; May -1.3%). 

 

Automotive markets in the maelstrom of intensified trade conflict

The global automotive market is experiencing considerable volatility, particularly due to the inconsistency surrounding the announcement, introduction, and partial withdrawal of high special tariffs by the United States on steel, aluminium, vehicles, and vehicle parts. In order to be able to anticipate new tariffs, manufacturers increased their production and, above all, delivery volumes for the US market as far as possible in the short term. With the exception of Europe, demand has continued to recover. According to S&P Global Mobility (S&P GM), global sales of light vehicles (LV) rose by 4.8% by the end of May 2025. Production was also ramped up, but grew at a slower rate than demand at just +2.5% until the end of May, resulting in a slowdown in momentum tended (Q1 2025: +2.6%, Q2 2025e: +1.7%). While production in China (5M 2025: +13.1 %) and Japan/South Korea (5M 2025: +3.6 %) grew, manufacturers in North America (5M 2025: -5.4 %) and Europe (5M: -4.6 %) were under pressure. In this generally challenging market environment, battery electric vehicles (BEV + PHEV) continue to gain ground, despite China having implemented restrictions on the export of rare earths. Data from the ACEA association shows that the share of sales of battery electric vehicles in Europe has risen from around 20% to more than a quarter within a year (6M 2025: 26.1%). In addition, hybrid cars (including mild hybrids) achieved a market share of just over a third (6M 2025: 35.0%), roughly on par with pure combustion engines (gasoline + diesel, 6M 2025: 36.1%). The commercial vehicle market, which was already lacking tailwind due to the weak momentum of the global economy and low investment activity on the part of companies, came under further pressure as a result of the tariff conflict. Based on data from S&P GM, production was therefore significantly reduced in the first half of 2025, probably by around 6% (Q1 2025: -5.8%; Q2 2025e: -6.5%).

 

 

Construction activity very heterogeneous worldwide – Europe’s construction sector emerging from downward spiral

In Asia’s emerging markets, the construction industry is one of the main pillars of the economy, supported by trends such as population growth and urbanization. Nevertheless, factors such as structural deficits can lead to temporary impacts. The Chinese real estate market has been in a deep crisis for several years. According to the NBS statistics office, residential construction had shrunk by 10.4% by the end of June 2025. Office buildings were down 16.8 %, while commercial buildings fell by 8.4 %. By contrast, China is investing heavily in industrial production facilities and infrastructure, including in the transportation, energy, and water sectors.

In Europe, the picture gradually brightened. After a weak phase lasting several years, the construction sector has gained momentum in line with the moderate recovery of the economy as a whole and low interest rates (Q1 2025: -0.5 %; April: +4.7 %; May: +2.9 %). Construction output increased in parts of Eastern Europe and in Scandinavia. The trend was also positive in Austria, Spain, and Portugal. France and the Netherlands, on the other hand, remained under pressure. Production in the German construction industry was still negative, but the first signs of stabilization were visible. As a result, real incoming orders rose slightly from a low level.

 

Higher prices and interest rates, tariff uncertainties, and weather effects put pressure on US construction activity

In the USA, the previously dynamic construction industry slowed noticeably in the first half of 2025. The growth expected by many experts failed to materialize. Increased interest rates and higher consumer goods prices, coupled with ongoing uncertainty over tariffs, brought activities to a standstill. This affected both the renovation of existing houses and the construction of new residential and commercial buildings. According to the U.S. Census Bureau, total construction spending fell by 2.2% in the first half of 2025, with private construction shrinking by 3.9%. Multifamily housing (-12.7%) and commercial construction (-14.6%) slumped. New single-family housing construction also declined (-2.6%). These declines are partially offset by a more stable repair and renovation market. The Harvard JCHS LIRA Index reports growth of 2% in the first six months of 2025. Growth in the US market slowed in particular due to more extreme weather conditions in the first quarter of 2025, which mainly affected the Southeast and the Mid-Atlantic regions and restricted both renovation and new construction work there. In the second quarter of 2025, unseasonably bad weather in certain regions also had an impact on construction activity in the US.