FRANKFURT (Reuters) - Germany's economy will shrink for the second year in a row this year and its recovery will be lacklustre, potentially exacerbated by a trade war with the United States, Bundesbank President Joachim Nagel said on Friday.
Germany, the euro zone's biggest economy, has been suffering for years since its mighty industrial sector lost access to cheap Russian energy and as China's appetite for German exports has dwindled.
The German economy is now seen stagnating through the winter months, then recovering at the slowest possible pace as an expected rise in private consumption will be smaller than once predicted, the labour market could weaken further and business investment recovers only slowly.
"The German economy is not only struggling with persistent economic headwinds but also with structural problems," Nagel said. "The labour market, too, is now responding noticeably to the protracted weakness of economic activity."
The Bundesbank now sees the German economy shrinking by 0.2% this year after predicting a 0.3% expansion in June while the 2025 growth outlook was cut to 0.2% from 1.1%.
But even these figures could prove overly optimistic, the bank cautioned, given threats from growing protectionism, geopolitical conflicts and the impact of structural change on the German economy.
Simulations of increased tariffs from the Trump administration show that the U.S. would suffer the biggest growth hit but Germany would also lose 1.3% to 1.4% of output through 2027, the Bundesbank added.
Inflation could also rise on these measures but the magnitude was less certain.
RISKS
The Bundesbank sees an inflation rise of just 0.1% to 0.2% a year through 2027 on Trump's protectionism but the National Institute Global Econometric Model projected a 1.5% hit next year and 0.6% in 2026, the Bundesbank said.
"Risks to economic growth are currently tilted to the downside and risks to inflation to the upside," the Bundesbank said, adding that federal elections in the coming months could also alter 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 even more easing to come as inflation fears have largely subsided and the focus is shifting towards growth.
The Bundesbank, however, is not yet ready to sound the all-clear over price growth, saying on Friday that food price inflation could jump and services inflation would remain elevated, keeping price increases above the euro zone average.