Germany is facing lethargic growth, a potential blow from Trump, the Bundesbank told Reuters

FRANKFURT (Reuters) – Germany’s economy will shrink for a second straight year this year and its recovery will be weak, potentially exacerbated by a trade war with the United States, Bundesbank President Joachim Nagel said on Friday.

Germany, the eurozone’s largest economy, has suffered for years since its powerful industrial sector lost access to cheap Russian energy and as China’s appetite for German exports waned.

The German economy is now seen stagnating during the winter months and then recovering at the slowest possible pace as the expected increase in private consumption will be lower than previously predicted, the labor market could further weaken and business investment is recovering only slowly.

“The German economy is not only struggling with persistent economic headwinds, but also with structural problems,” Nagel said. “The labor market is also now reacting noticeably to the prolonged weakness in economic activity.”

The Bundesbank now sees the German economy shrinking by 0.2% this year after forecasting a 0.3% expansion in June, while the outlook for growth in 2025 has been cut to 0.2% from 1.1%.

But even these numbers could prove too optimistic, the bank warned, given the threats of rising protectionism, geopolitical conflicts and the impact of structural changes on the German economy.

Simulations of tariff increases from the Trump administration show the US would suffer the biggest growth hit, but Germany would also lose 1.3 to 1.4 percent of output by 2027, the Bundesbank added.

Inflation could also rise based on these measures, but the magnitude was less certain.

RISKS

The Bundesbank sees inflation rising to just 0.1% to 0.2% annually through 2027 based on Trump’s protectionism, but the National Institute’s Global Econometric Model predicts 1.5% next year and 0.6% in 2026 , the Bundesbank announced.

“Risks to economic growth are currently tilted to the downside and risks to inflation are to the upside,” the Bundesbank said, adding that federal elections in the coming months could also change the fiscal outlook.

This persistent weakness is one of the key reasons why the European Central Bank cut interest rates on Thursday and hinted at further easing as inflation fears have largely subsided and the focus shifts to growth.

The Bundesbank, however, is not yet ready to come clean on price rises, saying on Friday that food price inflation could pick up and service inflation would remain high, keeping price growth above the eurozone average.