German institutes warn of recession if trade conflict escalates

Any escalation of trade friction involving the United States could cause a major recession in Germany and Europe, Germany's leading economic institutes said on Thursday.

The institutes also said U.S. President Donald Trump's threat to impose tariffs on car imports from the European Union would cost jobs and harm productivity and prosperity in Germany.

"Retaliatory measures by the EU would probably ease the economic downturn in the EU and cause a major recession in the United States," the institutes said in a report, which had been flagged by Reuters on Wednesday.

The EU has said it would respond in kind if Trump imposed further car tariffs while the two sides discuss how they could cut trade barriers.

Significant and widespread further tariff measures from Washington, meanwhile, "would probably trigger a major recession in Germany and Europe," the report states.

The institutes gave no timeframe for that scenario.

They cut their 2018 GDP growth forecast to 1.7 percent from 2.2 percent.

The move comes after the BDI industry association cut its 2018 forecast to 2.0 percent from 2.25 percent on Tuesday, citing weaker demand for German exports due to U.S. trade policy and Brexit, as well a threat to the economy from xenophobia at home.

Germany, where one in three jobs depend on exports, would be hard hit by any U.S. tariffs on car imports given the large size of its automotive sector. Tensions rose last month after Trump rejected an EU offer to eliminate auto tariffs.