Specific reference to “Dangerous Scenario” (ed. Or perhaps a better “horror scenario?) Makes its central bank Germany (Bundesbank) in its monthly report, published yesterday (6.6.25).
This Bundesbank scenario, which is characterized (by itself) as … unlikely, provides for the escalation of the International Commercial War after July 9 (when the three -month suspension of US duties 20% at the expense of the EU etc) and recession in Germany by 2027!
‘Uncertainty about future US trade policy remains high’notes Bundesbank.
And adds that “Returning to higher duties is threatened for most commercial partners since July. In this context, the following risk scenario provides a picture of the possible impact on the German economy if the commercial situation worsens again – compared to early April – and provokes yet another serious reaction to financial markets.
The analysis of the scenario assumes that The increases in duties announced in early April, which have currently been partially suspended, will be in full force, followed by renewed, strong reactions to financial markets and persistently high uncertainty about US economic policy. It is assumed that trade negotiations with the US will fail and that the US will demand the so -called “reciprocal” duties in almost all imports from the third quarter of 2025, at the level announced on April 2, 2025. “
Also, “Imports of US goods from the EU will be subject to an additional 20%duty instead of the current 10%additional. It is also assumed that the EU will respond to retaliation for the same size.
For bilateral trade between China and the US, the high duties achieved at the end of recent escalation are used. In addition, the scenario assumes that the uncertainty about economic and commercial policy will remain high throughout the forecast period. Based on the observations that followed the duties announcements on April 2, it is further believed that these developments will cause significant disorders in financial markets. “
1.The impact on the US
Bundesbank stresses that ‘in this scenario, The global economy will be seriously affected. The impact of the script-framework on the international environment is based on analyzes of the ECB staff. Wide US import duties are causing inflation in the US.
However, they also significantly reduce economic production there. In addition to retaliation taken by US trade partners, high level of uncertainty and loss of confidence in the US economy contribute to it.
In financial markets, especially in the US, this will lead to a sharp decline in shares prices and increase bond yields, with the deterioration of funding conditions further preventing investment.
Due to the close international interdependence of markets and financial markets, commercial policy disorders, high levels of uncertainty and financial market reactions significantly burden global economic activity, and in particular global trade. Due to the lowest demand for goods markets, the price of oil decreases.
As for the US dollar exchange rate, there are opposing effects. Individual, the highest US import duties will create upward pressure on the US dollar.
On the other hand, the deterioration of US growth prospects and loss of confidence lead to a tendency to devalue the American currency.
The calculations presented here initially assume that the two effects are heavily offset, so that the US dollar’s bilateral exchange rate against the euro remains unchanged.
Subsequently, the additional impacts that would arise if the US dollar is constantly depreciated against the euro on a scale similar to the one observed after duties in early April.
2. The impact on Germany
The central bank of Germany stresses that “the model’s calculations show a significant risk of a downward course for economic growth in Germany. Based on the implications of the international environment and financial markets, the impact on the German economy are estimated using the Bundesbank macroeconomic model.
Overall, the risk scenario results in a significant burden on the German economy.
As a result of the slowdown in global development and the lower demand for imports from commercial partners, German exports are under severe regression.
While the significantly reduced overall economic demand is also attributed to the immediate impact of commercial policy disorders caused by US and EU and China retaliation, much of it is due to increased global uncertainty.
Companies are likely to postpone their investment decisions more and more due to the lack of design certainty.
Overall, The growth losses in real GDP will accumulate in just over 1.5 percentage points by 2027 compared to the basic scenario.
The loss of GDP growth is already noticeable this year at 0.5 percentage points. Next year, this will reach the maximum, with GDP growth lower by 0.9 percentage points. However, even in 2027, there will be a negative effect on growth by 0.2 percentage points. “
3. The impact on the euro and prices
“If the euro is also priced by 5% against the US dollar – similar to the one observed in April – this will increase the negative effect on GDP growth by cumulative 0.2 percentage points by 2027”complements the Bundesbank.
And he explains that “in such a scenario, the recovery of the German economy provided for in the basic scenario of forecast will be delayed by 2027.
GDP will reduce the current and next year. The harmonized consumer price index is slightly reduced below the basic prediction scenario in the risk scenario, although the reduction could be a bit more intense if the US dollar is depreciated against the euro. On the price side, the EU import duties imposed as retaliation on their own have a growth effect on prices. On the other hand, the weaker economic activity in Germany reduces inflation.
In addition, the fall in oil prices caused by the patient worldwide is reflected in the lowest consumer prices.
Overall, inflation rate is slightly lower than in the basic scenario, with the overall negative effect increasing during the prediction period.
If the US dollar is permanently depreciated by 5% against the euro, the inflation rate could be reduced by 0.1 additional percentage percentage each year.
Many of the cases used to calculate the risk scenario are subject to high uncertainty.
For example, duties ultimately imposed by the US and any retaliation could exceed those who are supposed to be the risk scenario in the event of a escalation of the conflict.
The US president’s recent threats against the EU are pointing to this. The extent of the reactions of financial markets and currency markets to the highest additional duties is also uncertain. It is possible that a new tightening of US trade policy will lead to even greater turmoil in financial markets than observed in April.
This could further erode confidence in the US dollar. However, reactions could also be milder and more peripherally differentiated, as the escalation of duties may surprise markets less than in early April.
For the US dollar, the removal trends against the euro could potentially prevail due to the higher US duties. However, in such a risk scenario, international commercial interdependencies could also be significantly affected and lead to disorders in global value chains.
Depending disorders on the supply side are likely to lead to significant price increases – as observed in the coronary pandemic. In a significantly more protective world, there are also possible greater productivity losses and, therefore, more intentions in production costs in the medium term.
Finally, the results of such scenario analyzes always depend on the selected model frame. “