US Trade Conflict: A Long-Term Threat to Germany's Economic Progression
German economy predicted to stagnate in 2025 by Bundesbank.
Germany's economy may grind to a halt by 2025, thanks to the trade war ignited by US President Donald Trump, as per the German Bundesbank's latest prediction. The bank, which had anticipated a meager 0.2% growth in GDP in December, has now lowered its projection, citing the new US tariffs and the uncertainty about future US policy as the main reasons for the dampened economic growth.
Joachim Nagel, Bundesbank's President, explained that the German industry is bearing the brunt of the trade war at a time when it was just beginning to stabilize following a long period of weakness. However, the bank believes that the state's significantly increased defense and infrastructure spending is expected to offer a substantial boost to GDP, starting in 2026.
In 2026, the economic output is projected to grow by 0.7%, and in 2027, it is expected to increase by a substantial 1.2%. For 2027, the bank has revised its forecast upwards, originally predicting only 0.9% growth. The inflation rate is anticipated to fall to 2.2% this year, followed by a slower increase in consumer prices to 1.5% in 2026 and a rise to 1.9% in 2027 - good news for consumers and the economy, according to Nagel.
However, the bank warned that uncertainty remains 'exceptionally high' and poses risks for economic growth and inflation in both directions. If the trade conflict with the US escalates and leads to 20% surcharges on EU products and retaliatory tariffs, the Bundesbank's forecast predicts a recession for Germany for two more years, with GDP decreasing by 0.5% in 2025 and 0.2% in 2026.
While the base outlook for 2025 suggests zero growth, Germany could face more extended periods of economic instability if the trade war persists. Escalating trade tensions could depress GDP growth, rekindle inflationary pressures, and weaken investment by increasing uncertainty and costs. Trade diversification and renewed EU-US trade negotiations are crucial for managing these risks and mitigating their impact on the German economy.
[1] Source: Bundesbank's April Economic Report[2] Source: McKinsey & Company's "Germany's Export-Led Recovery: Sustainable or Sustained?" report[3] Source: International Monetary Fund's "World Economic Outlook" report
- To mitigate the potential negative impacts of the trade conflict on the German economy, it is essential to address employment policies within various sectors, such as community and business, to ensure stability and encourage investment, while promoting trade diversification and renewed EU-US trade negotiations.
- In the event of an escalation in trade tensions, the German finance sector would likely experience increased uncertainty and higher costs, which could exert pressure on the nation's employment policies and lead to a potential slowdown in growth and increased inflation rates.
