Fiscal boost lifts the outlook for German regions

Additional US tariffs have led us to downgrade our short-term outlook for the German economy, with this impact mostly concentrated in southern regions of the country. In contrast, Germany’s large fiscal package to boost defence and infrastructure spending means that we now expect stronger growth over the medium term, with all regions set to benefit.

• Regarding exposure to US tariffs, we find that the economies of Bremen, and the southern states of Baden-Württemberg (home to Stuttgart), Saarland, and Bavaria (home to Munich) are the most reliant on US exports. For these states, the high exposure primarily reflects the presence of prominent auto-producers, including Mercedes-Benz and BMW, for which the US tariff is now set at a higher rate of 25%. North Rhine-Westphalia (home to Dusseldorf and Cologne) is also vulnerable, as the largest exporter of metals to the US.
• As German defence equipment producers are already severely backlogged with orders, a key challenge for them will be to increase capacity. As such, there are numerous plans of new defence production facilities, as well as repurposing of civilian plants, across the country. Therefore, we expect the spending boost to have a wide geographical impact, especially when also considering supply chains. And we anticipate a similar story for the additional infrastructure spending.
• Over the next five years, we forecast Berlin to be the fastest-growing German major city economy, driven by its dynamic ICT and large public services sectors. Munich is in second place, while the up-and-coming eastern city Leipzig closes the German top three. Cologne and Hamburg are in the middle of our ranking for medium-term GDP growth, while Dusseldorf and Stuttgart are at the bottom.