Italy, trade worries bite into German growth forecast

The DIW economic institute has slashed its growth forecast for Germany due to an unexpectedly weak start to 2018 and risks from abroad including concerns about Italy's new government and the escalating trade conflict with the United States.

Italy's coalition government comprises anti-establishment parties with a brief to shake up EU institutions while U.S. President Donald Trump has threatened allies with hefty tariffs on car imports in addition to unilaterally imposed metal duties.

The Berlin-based DIW think-tank said it cut its gross domestic product growth forecast for Europe's largest economy by 0.5 percentage points to 1.9 percent this year, and by 0.2 percentage points to 1.7 percent in 2019.

"Uncertainty arises mainly from growing concerns about some European countries, mainly Italy, and the possibility of an escalating trade conflict between the United States and the rest of the world," DIW said.

The uncertain business outlook is causing companies worldwide to scale back investments and this is putting the brakes on German export growth, DIW added.

"The situation in Italy is causing the fear of a resurgence of the euro zone debt crisis," DIW head Marcel Fratzscher said.

“It's a wake-up call for politicians in Europe, especially for the German government, to finally lean into the reform debate for a more crisis-prone Europe. "The proposals and options are on the table, now it's time for action. European nations have to put up a united front, also against Trump and his protectionism," Fratzscher said.

France and Germany, the euro zone's two biggest economies, want to agree a roadmap for European Union reforms by June 19 in order to present later to EU leaders at the June 27-28 summit.