BERLIN (April 10): German economic institutes on Thursday cut their growth forecast for this year to 0.1% from the 0.8% expected in September, taking into consideration initial US tariffs on steel, aluminium and cars, and confirming an earlier Reuters report.

Exports-dependent Germany is the only G7 economy that has contracted for the last two years.

The further "reciprocal" tariffs announced by US President Donald Trump on April 2 and suspended on Wednesday could still deal a major blow to Europe's biggest economy, the institutes said, possibly "doubling the negative effects."

"The announcement of the tariffs alone has caused massive damage," German Economy Minister Robert Habeck said on Thursday, noting that it has shaken the confidence of the economy and trading partners, and thrown the markets into chaos.

"The consequences of an actual introduction would be devastating, especially for the US," Habeck said.

The tariffs could put Germany on track for a third year of recession for the first time in post-war history.

Trump's "aggressive trade policy (is) keeping the global economy on tenterhooks," said Klaus Weyerstrass of the Vienna-based research institute IHS, which contributed to the forecast.

"Changes to tariffs can occur practically daily, which has increased economic policy uncertainty to an unprecedented degree," he said.

The institutes' new forecasts factor in US tariffs of 25% on EU aluminium, steel and cars — which are still in place — but not the tariff increases of 20% on other goods announced last week and suspended for a 90-day period on Wednesday.

German conservatives under Friedrich Merz agreed a coalition deal with the centre-left Social Democrats on Wednesday, aiming to revive growth in Europe's largest economy.

The new government unveiled economic and tax reforms aimed at bringing Europe's largest economy back to growth.

For 2026, the institutes forecast economic growth of 1.3%, unchanged from the previous forecast.

After the February election, the conservatives and the Social Democrats announced a 500 billion euro (US$544 billion) fund for infrastructure and sweeping changes to borrowing rules to bolster defence and revive growth.

The fiscal package would likely lead to additional government spending of 24 billion euros in 2026, adding half a percentage point to economic growth, the institutes said.

Torsten Schmidt of the RWI institute, which also contributed to the forecast, warned that additional spending in areas such as civil engineering and defence should be executed over time.

The new government "needs to exercise a bit of judgement here in order to channel the funds in such a way that they promote growth in the real economy and do not simply evaporate in price effects," he said.

Regarding deindustrialisation fears, the head of the Bundesbank, Joachim Nagel, does not see German industry as in decline.

"When I look at the situation of German industry, when I look at how the economic results of companies in Germany have developed, it looks very good," Nagel said.

Economic weakness is set to take a toll on the German labour market, however. Unemployment is seen edging higher this year to 6.3% from 6.0% in 2024, before falling to 6.2% next year.

Inflation in Germany is expected by the institutes at 2.2% this year, before falling to 2.1% in 2026.

The economy ministry incorporates the combined estimates from the institutes — Ifo, DIW, IWH, IfW and RWI — into its own predictions.
 
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