Germany could face another two years of recession if the trade war with the United States significantly escalates, the Bundesbank, Germany’s central bank, warned on Friday. This represents a new blow for Europe’s largest economy, which is already in an extended period of difficulty, reports The Local, translated by albinfo.ch.
According to the Bundesbank’s worsened scenario, if tariffs announced by President Donald Trump are fully implemented by July 2025 and the European Union retaliates, then German economic output is projected to fall by 0.5% this year and by 0.2% in 2026.
This scenario includes “a significant decline in exports and a high level of uncertainty that negatively impacts investments,” the Bundesbank stated. However, the institution predicts a modest rebound in 2027, with a growth of 1%. The trade war has the potential to severely hit Germany’s most powerful export sectors. The United States was Germany’s largest trading partner in 2024, primarily importing vehicles, pharmaceutical products, and machinery.
The German federal employment agency warns that 25% tariffs from the US side could cost Germany around 90,000 jobs within a year. “The lack of predictability from the US is seriously damaging the German labor market,” the agency’s head, Andrea Nahles, told the Sueddeutsche Zeitung newspaper. According to her, this situation is preventing companies from investing, hiring, and training new employees.
In addition to the worst-case scenario, the Bundesbank also presented a more moderate baseline forecast, where the effects of Trump’s policies would be limited. Under this scenario, the German economy would stagnate in 2025, then move into a slight growth of 0.7% in 2026 and 1.2% in 2027. This is projected to happen thanks to increased investments in infrastructure and defense by the new government of Chancellor Friedrich Merz.
Nevertheless, the significant uncertainty surrounding trade developments is forcing German institutions to lower economic growth expectations. The German government and leading economic institutes have already reduced their growth forecast for 2025 to zero.
