Germany faces two more years of recession if US trade war escalates: central bank

FRANKFURT: Germany could face two more years of recession if a trade war with the United States escalates sharply, the central bank said on Friday, a bleak warning for Europe's struggling top economy.

If US President Donald Trump's tariffs were to be implemented in full from July and the EU were to retaliate, then German output would decline by 0.5% this year and 0.2% in 2026, the Bundesbank forecast.

This would be due to a "marked decline in exports and significant uncertainty weighing on investment," it said.

There would be a return to growth in 2027, with a rebound of 1%, it said.

The eurozone's traditional growth engine has already contracted for the past two years due to a manufacturing slump and surging energy prices after Russia invaded Ukraine, but hopes had been high for a modest recovery this year.

When Trump unveiled his "Liberation Day" tariffs in early April, he threatened to hit the European Union with a 20% levy over its hefty surplus in goods traded with the United States.

He then paused those higher rates until July to allow for talks to try to reach a deal. More recently he said he would slap the EU with a 50% tariff rate as negotiations stalled – but has also delayed that measure.

The bloc still faces a baseline 10% tariff rate on all its exports to the United States, as well as higher levies on some specific sectors.

Trump's tariff blitz stands to hit export power Germany hard, as the United States was Germany's top trading partner in 2024, receiving huge quantities of its cars, pharmaceuticals and machinery.

As well as a worst-case scenario, the Bundesbank also released baseline growth projections.

These envisage US trade policy having a more moderate impact on Germany as new Chancellor Friedrich Merz's planned spending surge on infrastructure and defence helps support the economy.

Under these forecasts, the economy would stagnate this year before expanding by 0.7% in 2026 and then 1.2% in 2027.

The German government and many economic institutes have already slashed their growth forecasts for this year to zero, citing the uncertainty triggered by Trump's trade war.

By RSS/AFP