The VDMA, which represents some 3,600 companies in the export-oriented machinery and equipment manufacturing sector, expects production to fall five percent for the full year.
But it should pick up next year, tracking a broader upswing in Europe's struggling top economy, with output set to rebound one percent, the group added.
VDMA President Bertram Kawlath added his voice to calls for the government of Chancellor Friedrich Merz to urgently take steps to improve conditions for companies in Germany.
"Genuine, far-reaching reforms in Germany are essential if we want to prevent more and more research, production and -- thus innovation -- from taking place abroad," he said.
The sector, whose companies employ more than one million workers in Germany, has been hard hit by US President Donald Trump's tariffs, particularly the 50-percent duties on steel and aluminium.
Two-thirds of about 400 companies that participated in a VDMA survey expect a decline in revenues due to the tariffs.
Describing the levies as "poison", Kawlath urged Germany and the European Union to seek to renegotiate them, saying they were counterproductive for both sides.
An even bigger challenge was competition from Chinese companies that are increasingly rivalling German firms in more and more sectors, and in some cases benefitting from government subsidies, the VDMA warned.
"Our companies are fighting with all means to remain competitive, but in many cases that is no longer enough," said Kawlath, urging an improvement in conditions in Germany through such measures as slashing red tape.
He called on the EU to strengthen its "inadequate" market oversight and block imports of Chinese products that do meet European standards.
The problems for Germany's engineering sector reflect a broader downturn in the economy, although a recovery is expected next year on the back of a public spending blitz pushed by Merz's coalition.
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