Bundesbank slashes growth forecasts, warns on impact of trade war

(Sharecast News) - The German economy will shrink this year and will stagnate over the course of 2025, said Bundesbank President Joachim Nagel, adding that a potential trade war with the US could make matters worse.

In its December forecast, the central bank slashed its forecasts and projected a contraction of 0.2 % - compared with June expectations of 0.3% growth - and only a slight expansion of 0.2 % next year. In 2026 and 2027, the economy then sees somewhat stronger growth, of 0.8 % and 0.9 %, respectively.

"The German economy is not only struggling with persistent economic headwinds but also with structural problems," Nagel said. "The labour market, too, is now responding noticeably to the protracted weakness of economic activity."

"At present, the biggest source of uncertainty for the Forecast is a possible global increase in protectionism," Nagel warned. He also cited geopolitical conflicts and the impact of structural change on the German economy.

"If the (Trump) tariff plans are implemented, it could easily cost us one percent of economic output in Germany," Nagel told the Die Zeit newspaper in an interview. Given that German economic growth will be below 1% in the coming year even without US tariffs, economic output could actually slip into negative territory, he added.

In a scenario modelled by the Bundesbank where the incoming US Trump administration imposed a 10% per cent tariff on European goods and a 60% levy on Chinese exports, domestic GDP in Europe's biggest economy could see a fall of 0.2 - 0.6 percentage points next year.

Economic output in Germany in 2027 would be 1.3% - 1.4%, with the modelling pointing, across various models, to considerable downside risks to economic growth in Germany, the bank said.

Reporting by Frank Prenesti for Sharecast.com