Germany's leading industry association has slashed its 2025 economic forecast, warning that escalating global trade tensions driven by U.S. tariff policies could plunge Europe's largest economy into its third consecutive year of recession.

At the annual "Day of Industry" event, the Federation of German Industries (BDI) projected a 0.3 percent contraction in German GDP this year, down from its earlier estimate of a 0.1 percent decline.

"U.S. tariff policies -- including announced and partially implemented duties on a wide range of imports -- combined with geopolitical uncertainties, are dampening global growth," BDI Director General Tanja Goenner said on Monday.

BDI now expects global GDP to grow by 2.7 percent in 2025, half a percentage point lower than its earlier forecast, with the United States among the most affected.

Although Washington has temporarily suspended "reciprocal tariffs" on European Union goods, the levies are set to resume on July 9. BDI estimates that, together with existing U.S. tariffs on EU-made cars and steel, these measures could reduce Germany's 2025 growth by around 0.3 percentage points.

"The German industrial sector is bracing for another difficult year," Goenner said, noting that industrial output remains 9 percent below pre-pandemic levels and factory utilization is stuck below 80 percent. Despite some signs of stabilization, she added, "there is no sign of a real recovery."

Germany's economy contracted in both 2023 and 2024, its first consecutive recession in two decades, driven largely by a prolonged downturn in manufacturing.

"There is still a long road ahead to emerge from recession," BDI President Peter Leibinger said. While he welcomed recent government measures such as tax relief, he stressed the need for more substantial reforms.

Leibinger called on Chancellor Friedrich Merz's coalition to implement bold structural changes, including cutting red tape and permanently lowering energy costs to restore Germany's long-term industrial competitiveness.