Forecasts cut German economic institutes warn of recession if trade dispute worsens

Just as exporters were reveling over their robust performance over the summer, a major economic report highlights Germany's vulnerability to Trump's trade war.
Bones of contention.

Any escalation of the trade dispute with the United States could cause a major recession in Germany and Europe, Germany's leading economic institutes said.

So far, Germany and Europe have been largely spared in the trade conflict emanating from the US, as the economic impact of the new tariffs is low, the researchers wrote in their joint fall report for the German government. The document was made available to media on Wednesday, a day ahead of its official publication.

But the researchers made clear that this situation teeters on a knife-edge. "Any escalation of the trade conflict, leading to considerable tariff increases by the US on a broad front, is likely to trigger a severe recession in Germany and Europe," the report said. The institutes gave no time frame for that prospect.

Retaliatory measures by Europe would "probably soften the economic downturn in the EU and trigger a severe recession in the US."

Tariffs on autos would threaten German prosperity

The institutes also said President Donald Trump’s threat to impose tariffs on car imports from the EU would cost jobs and curb productivity and prosperity in Germany. The EU has said it would strike back if Mr. Trump imposed further car tariffs just as both sides discuss how to demolish trade barriers.

Mr. Trump regularly complains that the US sells far fewer goods to Germany and to the EU than vice-versa. This summer, the US introduced a range of punitive tariffs on Europe, notably for aluminum and steel.

Underlining the risks to Germany's export-led economy, the institutes cut their German growth forecast for this year to 1.7 percent from 2.2 percent. The news comes a day after the industry association BDI trimmed its GDP forecast to 2.0 percent from 2.25 percent, pointing to weaker demand due to US trade policy and risks from Brexit.

The report, to be presented to the government in Berlin on Thursday, was prepared by five economic institutes: Munich's Ifo, Berlin's DIW, Essen's RWI, Kiel's IfW and Halle's IWH.

Donata Riedel covers economic policy for Handelsblatt, while Frank Specht reports on the German labor market and trade unions. Jeremy Gray is an editor for Handelsblatt Global in Berlin. To contact the authors:  [email protected][email protected], and [email protected].