The German central bank lowers growth forecasts and sounds the alarm about the trade war

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Germany faces another year of economic stagnation after the German central bank cut the country’s growth forecast for 2025 and warned that the US-led trade war risks pushing it into recession.

The central bank said on Friday that Europe’s largest economy would grow by just 0.1 percent next year.

But she added that if President-elect Donald Trump follows through on his threats to impose 10 percent tariffs on European goods and 60 percent duties on Chinese exports, this could lead to a drop of up to 0.6 percentage points from Germany’s GDP next year.

This means a contraction of up to 0.5 percent.

The new forecast, published as part of the central bank’s monthly report for December, is much bleaker than its June forecast, when it forecast a moderate recovery with GDP growth of 1 percent.

The Bundesbank has since written off any meaningful rebound in consumer spending next year, and now also expects a decline in business investment.

“The German economy is not only suffering from persistent cyclical headwinds, but it is also facing structural problems,” said Bundesbank President Joachim Nagel, pointing to fading productivity growth and the crisis in large parts of Germany’s manufacturing industry.

The forecast comes as European economies – relatively vulnerable to China’s current slowdown – face lackluster growth compared to growth in the United States. They are also bracing for the impact of a potential trade war when Trump returns to office.

On Thursday, the European Central Bank Weakened It expected growth as it reduced interest rates to 3 percent, while on Friday UK A monthly economic contraction of 0.1% was announced for October.

Germans are set to go to the polls for snap elections in February amid widespread discontent over the country’s economic problems.

The German economy has not grown since its post-pandemic recovery, with GDP shrinking by 0.3 percent in 2023 and 0.2 percent this year.

Even the once gravity-defying labor market is expected to falter next year, the German central bank said, with unemployment rising to the highest level in more than a decade and wage growth slowing.

The central bank’s economists are even more pessimistic than the widely respected German Council of Economists, which in November forecast growth of 0.4 per cent.

The Bundesbank now expects only a moderate recovery in 2026, with GDP expected to rise by 1.1 percent, down from the 1.6 percent expected this summer.

Even without a trade war, the German labor market will suffer next year.

The Bundesbank’s base scenario shows the number of unemployed will rise above the psychologically important threshold of 3 million in 2025 for the first time in 14 years, up from 2.8 million this year.

The unemployment rate is expected to rise from 6 percent this year to 6.3 percent in 2025, a level last seen in 2011.