A new report commissioned by the German government shows that the country—and indeed the wider European Union—could plunge into recession if there is an escalation of trade disputes with the United States. And if the EU strikes back in those disputes, the researchers said, the result could be recession in the U.S.
As things stand, the U.S. is levying tariffs on imports of EU steel and aluminum, while the EU has retaliated with tariffs on $3.2 billion worth of U.S. imports.
U.S. President Donald Trump has long wanted to stop Germany exporting luxury cars to the U.S., and the EU was mulling a large-scale retaliation if he were to follow through on that threat. The two sides agreed in July not to step up their dispute, but last month Trump seemed to be getting impatient, as he again threatened a 25% levy on imports of European cars.
The existing tariffs haven’t had a great economic impact, but those new U.S. car tariffs would lead to job losses and productivity cuts in Germany, said five economic institutes in their report for the government, due to be handed over Thursday. Germany’s Handelsblatt previewed the paper Wednesday.
“Any escalation of the trade conflict, leading to considerable tariff increases by the U.S. on a broad front, is likely to trigger a severe recession in Germany and Europe,” warned the researchers, from the German Institute for Economic Research, the Ifo Institute for Economic Research, the RWI Leibniz-Institute for Economic Research, the Kiel Institute for the World Economy, and the Halle Institute for Economic Research.
However, the institutes said retaliatory measures from the EU side could help to soften the downturn at home, and even “trigger a severe recession in the U.S.”
The researchers said their forecast for German growth this year was now 1.7%, down from the previously-predicted 2.2%.