The Bundesbank sounds the alarm over the trade war with the United States

Germany’s central bank yesterday sharply lowered its growth prospects for the country.

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

The bank now expects gross domestic product to contract 0.2 percent this year – a second straight year of contraction – after previously forecasting 0.3 percent growth.

And it cut growth prospects for 2025 from 1.1 percent to 0.2 percent.

The performance could be even worse if US President-elect Trump follows through on his promises, including imposing import tariffs of 60 percent on Chinese goods and 10 percent on those from other economies, including Germany. This could shave up to 0.6 percentage points off growth next year, the Bundesbank predicted.

Germany’s export-driven economy is likely to “suffer considerably from such a U.S. policy shift,” according to a report released by the central bank.

‘Its heavy dependence on exports makes it particularly vulnerable to declining external demand resulting from global trade losses caused by restrictive trade policy.

“Growing uncertainty weighs even more on the German economy.” Germany’s industrial sector – including its once-mighty auto industry – has been struggling since it lost access to cheap Russian energy due to the war in Ukraine and as Chinese demand for German exports faded.

The crisis has sparked 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 go to the polls in February after an early election was called amid widespread dissatisfaction over the country’s economy.

Bundesbank President Joachim Nagel said: “The German economy is not only fighting persistent economic headwinds, but also structural problems.

“The labor market is also responding notably to the prolonged weakness in economic activity.”

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

The European Central Bank (ECB) cut interest rates to 3 percent this week – the fourth reduction this year – amid weak growth and political instability in Germany and France. ECB President Christine Lagarde said efforts to reduce inflation (now 2.3 percent) were bearing fruit, but she anticipated “a slower economic recovery.”