Bundesbank sounds alarm over US trade war

Germany’s central bank sharply downgraded its growth outlook for the country yesterday.

And the Bundesbank also warned prospects for Europe’s largest economy could sink even further if Donald Trump imposes damaging trade tariffs.

The bank now expects gross domestic product to shrink by 0.2 per cent this year – a second year in a row of contraction – having previously forecast growth of 0.3 per cent.

And it slashed the outlook for 2025 growth from 1.1 per cent to 0.2 per cent.

The performance could be even worse if US president-elect Trump fulfils pledges including the imposition of 60 per cent import tariffs on Chinese goods and 10 per cent on those from other economies including Germany. That could knock as much as 0.6 percentage points off growth next year, the Bundesbank predicted.

The export-driven German economy is likely to ‘suffer considerably from such a US policy shift,’ a report published by the central bank said.

‘Its strong reliance on exports makes it particularly vulnerable to the decline in foreign demand resulting from the global trade losses triggered by the restrictive trade policy.

‘The heightened uncertainty further burdens the German economy.’ Germany’s industrial sector – including its once-mighty car industry – has been struggling since it lost access to cheap Russian energy due to the war in Ukraine and as China’s demand for German exports faded.

The crisis has set off turmoil at Volkswagen which has been convulsed by strikes this month after the company threatened to close plants in Germany for the first time in its 87-year history.

Political instability has also weakened growth prospects as Germans prepare to head to the polls in February after a snap election was called amid widespread dissatisfaction about the country’s economy.

Bundesbank president Joachim Nagel said: ‘The German economy is not only struggling with persistent economic headwinds but also with structural problems.

‘The labour market too is now responding noticeably to the protracted weakness of economy activity.’

And acknowledging the threat posed by Trump’s plans, he added: ‘The biggest source of uncertainty for the forecast is a possible global increase in protectionism.’

The European Central Bank (ECB) cut interest rates to 3 per cent this week – the fourth reduction this year – amid weak growth and political instability in Germany and France. ECB president Christine Lagarde said efforts to bring down inflation – now 2.3 per cent – were bearing fruit but foresaw ‘a slower economic recovery’.

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