General Economic and Industry-Specific Conditions

 

Trade conflicts slow down the global economic recovery

In the first half of the year, the global economy remained characterized by the offensive US tariff policy, geopolitical risks and high levels of uncertainty, which could have a noticeable negative impact on the global economy in the near future. The US trade and economic policy, which is difficult to assess, combined with the sharp rise in government debt, is also putting increasing pressure on the US dollar. The ifW Kiel assumes that inflation in the USA will pick up, while it will continue to weaken in the eurozone. This could in turn lead to a stronger decoupling of monetary policy. While the Fed has very little scope for easing in the USA, the ECB is likely to cut interest rates further and thus stimulate the economy in the eurozone. The US economy is expected to lose considerable momentum, while a gradual economic recovery is anticipated in Europe thanks to improved domestic demand. However, China’s economy is not expected to gain momentum due to weak exports, despite the clear economic policy stimulus. On balance, the global economy is therefore likely to expand at a slightly slower pace in the current and coming fiscal years. In July 2025, the International Monetary Fund (IMF) updated its forecast, assuming that a further dramatic escalation of trade conflicts can be avoided. Nevertheless, global growth in 2025 is expected to be weak at +3.0% after +3.3% in the previous year (previous forecast: +2.8%). In the emerging and developing countries the pace of expansion is likely to slow to +4.1%  (2024: +4.3%) and to +1.5% in industrialized countries (2024: +1.8%).

 

German economy still subdued, but gradually wither silver lining on the horizon

According to estimates by the German Bundesbank, among others, the recovery of the German economy is being delayed. The new US tariffs and high uncertainties regarding US policy are likely to dampen growth in Germany in both 2025 and 2026. On the other hand, it can be assumed that the expansive fiscal policy of the new federal government will only have a noticeably positive impact from 2026 onwards. The measures should then act as a catalyst to strengthen the incipient economic recovery. In addition to a further tailwind from private consumption, gross fixed capital formation, which should have gradually bottomed out by then, is also likely to provide positive impetus. Among other things, this is indicated by lower energy costs and the improved order situation. Residential construction, on the other hand, should already pick up over the course of 2025. According to the Bundesbank, a visible turnaround in corporate investment, particularly in equipment, will only become apparent in the course of 2026. Overall, 2025 remains a very weak economic year. The forecasts are ranging within a narrow rage between stagnation and a growth of maximum +0.3 % (German Bundesbank, IMF, IfW and ifo). The forecast does not yet take into account the recent customs agreement between the US and the EU. Despite the negative impact on exports, it can be assumed that the German economy will be able to look to the following years with a little more confidence thanks to the more buoyant domestic demand.

 

Mechanical engineering sees improved order intake for the first time despite many

uncertainties

Structural growth drivers for investments in industrial manufacturing are the climate-friendly transformation of all economic sectors towards zero emissions as well as the topic area of AI-supported digitalization and automation of manufacturing processes and supply chains. In addition, the growing protectionism resulting from the US tariff policy calls for new concepts for the industrial production structure. The existing value chains, which are being massively disrupted, need to be rethought and realigned. However, these factors will only result in corresponding investments in the medium to long term. In the short term, the fluctuating and unpredictable trade policy of the USA has a counterproductive effect on the willingness to invest due to its low resilience and high level of uncertainty. Plans and projects are often put to the test. After a long dry spell, German mechanical and plant engineering recently recorded higher order intake (May: +9%, cumulative five months: +3%). The impetus came particularly strongly from the eurozone. The slightly positive economic outlook in Europe and the fall in interest rates are likely to have had an impact. Despite this ray of hope, the VDMA continues to expect a further decline in machine production in Germany of 2% in real terms in 2025, in contrast to a slightly positive global trend.

 

 

Heterogeneous automotive market: still no bright spot for passenger vehicles, but commercial vehicles on the verge of recovery

Due to the extremely unsteady US tariff policy, the challenges for the global automotive industry remain very great. Tougher countermeasures by China, Europe and other trading partners cannot be ruled out. For example, the limited availability of rare earths in China would severely affect e-car manufacturers outside of China. In any case, the announced tariffs alone are likely to place a heavy burden on the global market. S&P Global Mobility (S&P GM) is currently assuming that demand for light vehicles (LV) will grow slightly in the current year (+1.2%) and 2026 (+0.6%), but not enough to allow manufacturers to take on more risk. In this respect, production is likely to stagnate at a level of a good 89 million LV in both years. For 2025 in particular, S&P GM expects growth in China (+3.3%) and other Asian countries to be offset by losses in Europe (-3.0%) and, above all, North America (-5.4%). In terms of drive types, electric vehicles are set to become even more popular. According to S&P GM, battery-electric LVs (BEV + PHEV) are expected to account for 23.4% of total production in 2025 and 28.6% in 2026 (2024: 18.9%). Mild hybrids are also gaining in importance. According to the new forecast from S&P GM, the global market for commercial vehicles (CVs) is set to decline in 2025, impacted by US policy. Accordingly, the production of medium and heavy commercial vehicles will shrink by 1.2% in 2025. However, the losses were already recorded in the first half of 2025. Production is set to increase as the year progresses and a strong recovery is expected in 2026. 

 

Construction industry in Europe on course for recovery with initially tentative turnaround

Despite government stimuli, there are no signs of a turnaround in China’s construction industry. Although investments in the industrial and infrastructure sectors remain high, the half-yearly data from the NBS statistics office signal an unchecked downturn in building construction. The real volume of all building investments currently under construction is expected to shrink (-9.1%). New construction starts in residential construction and in offices and commercial buildings are expected to continue to plummet (-20.0%). In addition, there is no sign of stabilization due to lower financing funds (-6.2%). In other Asian countries, however, such as India, the construction sector is on the upswing. A trend reversal is emerging for the construction industry in Europe’s core markets as a result of lower interest rates and stimulated by growth initiatives. The experts from the Euroconstruct industry network (e. g. ifo) assume, however, that the recovery will be slowed down by the political risks (Ukraine war, US trade conflict). Only tentative growth of 0.3 % is expected for 2025 (West: +0.1 %; East: +2.8 %), although the upturn is expected to stabilize in the two following years with greater momentum and in more countries. France, Italy and Germany are seen as latecomers. The HDB association expects real turnover in the German construction industry to fall by 1.0 % in 2025 – in residential construction by as much as 4.0 % despite a moderate recovery in orders. 

 

 

US construction industry not expected to return to a more stable growth path until 2026

The outlook for the US construction industry in 2025 is very subdued. On the one hand, various long-term government projects are being curbed under the new US budget policy. On the other hand, the current shortage of credit is restricting private activities. The industry experts at FMI therefore only expect slight growth of 1% for the USA in 2025. The construction of multi-family houses is expected to slump by 9 %. This decline cannot be compensated for by the only slight increase in the construction of new single-family homes and expenditure on the conversion, replacement and extension of apartments (+1% in each case). Beyond 2025, there is general optimism that the US economy will recover and that the US construction industry will return to more stable growth rates by 2026. In connection with this, the Harvard JCHS LIRA Index forecasts sustained growth of 2% for 2026. This estimate relates primarily to renovation and conversion activities. The FMI initially expects commercial construction to stabilize in 2026. With regard to future developments, it is expected that consumers in the USA will make investment decisions in favor of new buildings and renovation projects due to more attractive mortgage interest rates. Overall, these forecasts point to a more stable market from 2026. A return to low single-digit growth rates is anticipated.