June 19, 2018 / 8:11 AM / 5 months ago

Germany's Ifo sees euro crisis 2.0, trade war slashing growth

BERLIN (Reuters) - Germany’s Ifo institute on Tuesday cut its forecasts for growth in Europe’s biggest economy this year and next, citing a weak start to the year and increased global risks.

Ifo said it expected the German economy to grow by 1.8 percent this year and in 2019, a big revision downwards from previous forecasts of 2.6 percent and 2.1 percent respectively.

“The economy developed significantly more weakly than anticipated in the first few months of the year,” Ifo economist Timo Wollmershaeuser said. “The global economic risks have risen significantly,” he added.

Ifo said the economic upswing in Germany should continue but at a slower pace, echoing an assessment by the Bundesbank last week.

In addition to weak industrial activity and exports in the first four months of the year, a trade dispute between the United States and the European Union is clouding the outlook for the German economy. U.S. President Donald Trump is threatening to impose hefty tariffs on car imports from European allies in addition to unilateral metals duties.

The Bundesbank said on Monday that German growth should rebound in the second quarter thanks to higher state spending, a humming construction sector and strong private consumption.

But it warned that trade and political concerns have made the outlook for the economy more uncertain and revised down its own growth projections.

A new Italian coalition government that comprises anti-establishment parties with a brief to shake up EU institutions has also unnerved German companies.

“The downside risks for the German economy have significantly risen,” said Ifo’s Wollmershaeuser. “Germany’s economic advantages are far outweighed by two risks — euro crisis 2.0 through Italy and a trade war.”

As well as the U.S.-EU trade dispute, German business leaders are worried that a trade confrontation between the United States and China could harm exporters that rely on the world’s two largest economies for growth.

China has raised tariffs on $50 billion in U.S. goods, responding to similar measures by Trump, who has also threatened a 10-percent tariff on $200 billion of Chinese goods.

“The likelihood that we have a trade war that also affects Germany is higher now than it was in spring,” said Wollmershaeuser.

Writing by Joseph Nasr; Editing by Catherine Evans

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