The US economy may experience a steeper economic slowdown this year than Europe's largest economy if US President Donald Trump imposes tariffs of 30% on imports from the European Union (EU), the IMK institute warned.

Germany could lose about a quarter of a percentage point in growth this year and next compared to current forecasts, the Düsseldorf-based institute said on Wednesday. That would mean zero GDP growth this year and 1.2% next year, it said.

In comparison, the US economy could drop 0.7 percentage points, primarily due to inflation and lower consumer spending, the institute said. The World Bank has forecasted that the US economy will slow to 1.4% this year, down from 2.8% in 2023.

Trump threatened in letters to the European Commission (EC) on Friday to impose tariffs of 30% on the EU if there is no progress on trade talks by the end of the month. This has raised concerns about a trade war within the world's largest economic bloc, which could slow global economic growth by 0.5 percentage points this year.

Markets have mostly shrugged off Trump's latest tariff threat that could impact

The German DAX 40 Index opened nearly 1% lower on Monday, at 24,038, as markets digested the risk of tariffs. The index, which has gained over 20% year-to-date so far, experienced one major correction in April when it crashed 19% and another in June, when it dropped 5.3% peak-to-trough.

German DAX 40, Source: Trading View

EU Warns of Consequences for US if Sanctions Imposed

EC President Ursula von der Leyen has signalled that the EU would defend itself against Trump's tariffs. The EU has finalized a second list of countermeasures targeting US goods worth €72 billion ($84 billion), including Boeing Co. aircraft, automobiles, and bourbon, in the event of a potential retaliation.

A robust response by the EU may have a greater impact on the US than Germany's GDP, according to the IMK institute. Growth losses in the US "would be far greater than in Germany,” it said.

Germany Could Benefit from Government Investment Plan

Germany's economy could benefit from a "rapid implementation of the planned public investment offensive could significantly reduce the economic risks in Germany,” IMK said.

Germany enshrined a €500 billion infrastructure and climate special investment fund in its constitution. It also amended its fiscal rules to increase defense spending. Both of which are widely seen as potential boosts for the country's struggling economy.

This has helped boost economic confidence. The ZEW Indicator of Economic Sentiment for Germany increased for a third consecutive month to 52.7 in July 2025, the highest level since February 2022, compared to 47.5 in June, and beating expectations of 50.3.

"Despite ongoing uncertainty due to global trade conflicts, nearly two-thirds of the experts expect the German economy to improve," ZEW President Professor Achim Wambach, PhD, comments on the recent results. "Hopes for a quick resolution to the US-EU tariff dispute, along with potential economic stimulus from the German government's planned immediate investment programme, appear to be shaping overall sentiment."

In May, industrial production increased by 1.2% month-on-month after a 1.6% drop in April. In the year, industrial production increased by 1%, supported by rises in the automotive and energy sectors.

Germany Faces Economic Headwinds Amid Optimism

The threat of tariffs, though, will create additional headwinds for Germany’s economy. IMK had forecast average growth of 0.2% for 2025, rising to 1.5% the following year, driven by a planned increase in public investment and defense spending.

More than half of Germany’s export-reliant engineering companies do not expect nominal sales growth this year, with 30% even expecting a decline, according to a separate survey by the VDMA industry association. The survey found that simmering trade tensions are a factor.

Activity in the construction sector weakened and appears to be a severe drag on the entire economy in the second quarter, according to ING Think.

"For the near term, downside risks have clearly increased on the back of ongoing trade tensions," ING Think said. The stronger euro, which effectively acts as an additional tariff, and the dry and hot summer weather are curbing growth, it said.

US, EU Were Close to Trade Agreement

The global economy could seize up in the second half of this year and is accompanied by a widespread collapse in confidence, surging uncertainty, and turmoil in financial markets," the World Bank said in June. "The combination of these multiplying shocks reduces global growth by 0.5 and 0.4 percentage points in 2025 and 2026, relative to the baseline, tipping the world economy into an extended period of anemic growth."

The economic uncertainty comes after the US and EU were “tantalisingly close” to a framework agreement, Irish Deputy Prime Minister Simon Harris said.

In the letter sent on Friday to EC's von der Leyen, Trump wrote: “We have had years to discuss our trading relationship with the European Union, and have concluded that we must move away from these long-term-large, and persistent, trade deficits, engendered by your tariff, and non-tariff, policies and trade barriers."

When the letter threatening the tariffs came, “there was surprise because, genuinely from a European perspective, there was an expectation that a deal was in there,” Irish broadcaster RTÉ News reported Harris as saying.

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