Trump's trade moves could send Germany into a recession, report warns

A worker packs coils at German steel technology group Salzgitter AG in Salzgitter in March 2015. (Tobias Schwarz/AFP via Getty Images)

The risk of a recession in Europe’s biggest economy rose significantly between March and April amid the fallout over President Trump’s increasingly restrictive stance on global trade, researchers said Monday. While economists with the German Institute for Macroeconomics and Economic Research (IMK) only saw a 6.8 percent likelihood of a recession within the next three months back in March, they now believe that a imminent economic downturn is 32.4 percent likely.

“President Trump’s flirtation with protectionism is sending out shock waves that are not only affecting financial markets, but also the German economy,” said Gustav Horn, the research director of IMK, which is part of a foundation with ties to a number of unions.

Germany is considered to be Europe’s economic powerhouse and its current economic boom has lasted for five years, even as the rest of the continent has struggled. Unemployment is now so low that companies have to routinely turn down orders due to a lack of workers and the German government recently celebrated a record tax revenue.

But with its export-driven economy and large trade surplus, the country has repeatedly drawn the ire of Trump who has lashed out at the European ally for allegedly exploiting the U.S. economy. Germany has rejected Trump’s accusations, saying that German investments in the United States employ hundreds of thousands of workers there.

Trump’s concerns are hardly new — he directly confronted the country on Twitter last May, for instance. But his decision to hit China with additional tariffs in March suddenly gave his previous threats much more weight, which explains why his long time stance on German trade is only now impacting growth forecasts.

[How Trump risked a trade war with China and alienated U.S. allies in less than 30 days]

Unlike China, Trump has so far not directly targeted Germany with tariffs — but researchers say that his protectionist threats alone have been enough to bring uncertainty to financial markets and exporters. It also remains unclear whether Trump may eventually expand tariffs to allies like Germany after all. “We don’t yet know whether U.S. punitive tariffs will eventually also apply to European goods, but concerns are mounting,” said Horn.

In Germany’s case, international outrage over dampened growth prospects would probably be limited, however.

While European leaders may go to great lengths to emphasize how little they have in common with Trump, many in fact share his concerns that Germany’s strength has come at a high cost for the entire continent. The strongest European economy has disproportionately benefited from the eurozone, in which it shares a common currency with many economically weaker nations.

If Germany had its own currency, it would be valued far higher than the euro. While the euro’s relatively low value is benefiting Germany’s export-driven economy, it has done little to revive southern Europe’s underperforming counterparts that have also struggled under harsh austerity measures.

Trump is not the first U.S. leader to express concerns over Germany’s lucrative trade surplus and its parallel insistence on more austere budget policies. The Obama administration similarly argued that Germany should stimulate consumer demand and German imports from other E.U. countries, rather than strengthen its own export industry.

Echoing such assessments, the German IMK researchers urged German Chancellor Angela Merkel on Monday to boost spending in order to strengthen Germany’s domestic economy rather than its increasingly volatile export industry.

“There’d be two positive repercussions if we strengthened domestic demand in Germany and Europe: Firstly, growth would react less to turmoil on global export markets. Secondly, this would lead to a lower German trade surplus — thus taking the wind out of Trump’s sails,” said Horn.

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