ECB’s Nagel: 2027 German GDP 1.5% Lower Than Forecast, Inflation Could Rise if US Policy Changes Drastically

17 February 2025

ECB’s Nagel: 2027 German GDP 1.5% Lower Than Forecast, Inflation Could Rise if US Policy Changes Drastically
Joachim Nagel, president of the Deutsche Bundesbank, at the Euro20+ Town Hall in Frankfurt on November 30, 2023. Photo by Felix Schmitt/ECB under CC BY-NC-ND 2.0.

ECB’s Nagel: 2027 German GDP 1.5% Lower Than Forecast, Inflation Could Rise if US Policy Changes Drastically
- Nagel: Depreciation of euro could strengthen price competitiveness
- Nagel: Positive effects of weak euro not enough to compensate negative impact
- Nagel: ‘Good chance’ of reaching 2% inflation ‘soon’ 

By Marta Vilar – MADRID (Econostream) – European Central Bank Governing Council member Joachim Nagel said on Monday that the German economy would shrink by 1.5% in 2027 and that inflation could increase if the US were to change its policy dramatically.

In a speech at a luncheon of the Union International Club in Frankfurt, Nagel, who heads the German Bundesbank, said that the ‘German economy would suffer considerably’ from a change in US policy assuming a 60% tariff to Chinese goods, a 10% levy for European exports, retaliation from affected countries, President Trump’s promised tax relief and his announced mass deportation plans.

The Bundesbank had carried out an analysis about the possible impact of this scenario on the German economy using two models, he said.

‘[E]conomic output in 2027 would be almost 1.5 percentage points lower than forecast’ according to this analysis, he indicated.

Germany would be vulnerable to weakened foreign demand due to its export-oriented economy, he said.

‘The depreciation of the euro could strengthen price competitiveness’, he added. ‘But this is not enough to compensate for the negative effects.’

The model customised for the German economy suggested that the impact on inflation from such policies would be ‘only minor’, he said.

However, the second model, which was a better reflection of the global economy, showed increases in inflation, according to Nagel.

‘The main reason for these differences is that the depreciation of the euro and the counter-tariffs are transmitted more quickly and comprehensively to consumer prices in the model that better reflects the global economy’, he added.

In the US, inflation would increase firmly and there was a risk of it being even higher if the Federal Reserve did not carry out significant tightening of its policy, he said.

‘A drastic change in policy in the USA would entail considerable risks for economic growth in Germany’, he said. ‘Inflation could also be fuelled, although the extent is very uncertain.’

The German economy had registered a contraction for two consecutive years and ‘things don’t look much better for the current year either’, he said.

The Bundesbank was only expecting moderate growth in 2025 and the economy would only improve significantly in 2026, according to Nagel.

 

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