Agency. Germany could face another two years of economic recession if the trade war with the United States escalates rapidly, the country’s central bank said on Friday. Germany’s output is projected to fall by 0.5 percent this year and 0.2 percent in 2026 if US President Donald Trump’s taxes are fully implemented from July and the EU retaliates.
Germany’s exports have fallen significantly due to US tax policy and there is great uncertainty in investment, the bank said. The bank expects Germany to pick up economic growth in 2027 with a recovery of 1 per cent. The eurozone’s traditional growth machine has shrunk for the past two years due to a slowdown in output and rising energy prices following Russia’s invasion of Ukraine, but hopes of modest recovery are high from this year, but it is likely to be impacted by U.S. tax policy.
Trump unveiled his Liberation Day tax in early April, threatening to hit the European Union with a 20 percent tax on a hefty surplus on goods doing business with the United States. He has decided to halt those high rates until July, allowing him to try a deal.
Recently, he said that he would impose a 50 percent tax rate on the EU. However, he has also delayed that measure. The EU group still faces a ‘basic’ or 10-percent tax rate on all of its exports to the United States, except for higher taxes in certain regions.
In 2024, the United States became Germany’s largest trading partner and received large quantities of cars, pharmaceuticals and machinery. U.S. trade policy is projected to have a moderate impact on Germany as new Chancellor Frederick Merz’s planned spending increases on infrastructure and defense will help support the economy.
According to these forecasts, the economy will remain stable this year before growing by 0.7 percent in 2026 and 1.2 percent in 2027. Germany’s government and several economic institutions have lowered their growth forecasts to zero for this year, citing uncertainty caused by Trump’s trade war. The European Central Bank (ECB) adjusted its interest rates on Thursday, saying it is in a “good position” to deal with global uncertainty.
As widely expected, the ECB cut its key deposit rate for the seventh time in a row to cut lending costs by a quarter, or 0.25 points, to 2 percent. The index is now expected to address the central bank’s target of bringing down inflation to 2 per cent this year.
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