The Bundesbank is sounding the alarm over the US trade war

The German central bank yesterday sharply lowered its growth prospects for the country.

And the Bundesbank also warned that prospects for Europe’s largest economy could fall even further if Donald Trump were to impose damaging trade tariffs.

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

And it lowered the outlook for growth in 2025 from 1.1 percent to 0.2 percent.

The performance could be even worse if newly-elected US President Trump follows through on his promises, including imposing 60 percent tariffs on Chinese goods and 10 percent on those from other economies, including Germany. That could force as much as 0.6 percentage points off growth next year, the Bundesbank predicted.

Germany’s export-driven economy is likely to “suffer significantly from such a US policy change,” according to a report published by the central bank.

‘Its high dependence on exports makes it particularly vulnerable to the decline in foreign demand due to global trade losses resulting from restrictive trade policies.

“The increased uncertainty places a further burden on the German economy.” Germany’s industrial sector – including the once-mighty auto industry – has struggled since it lost access to cheap Russian energy due to the war in Ukraine and as Chinese demand for German exports waned.

The crisis has caused unrest at Volkswagen, which was hit by strikes this month after the company threatened to close factories 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 snap elections were called amid widespread dissatisfaction with the country’s economy.

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

‘The labor market is now also noticeably responding to the continued weakness in economic activity.’

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

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