By Riham Alkousaa and Michael Nienaber
BERLIN (Reuters) - Germany's BDI industry association on Tuesday lowered its 2018 growth forecast on Tuesday and warned of a potential downturn, citing weaker demand for German exports due to U.S. trade policy and Brexit, and a threat to the economy from xenophobia at home.
The German economy is now expected to grow by 2.0 percent this year, down from a previous estimate of 2.25 percent, BDI President Dieter Kempf said. Exports will rise by 3.5 percent in real terms, below the BDI's initial forecast of 5 percent.
In an unusually strong intervention into domestic politics, Kempf also warned that the German economy could be hurt by a wave of nationalism, after violent protests in the eastern city of Chemnitz that followed a stabbing blamed on migrants.
"Investments of foreign companies and the integration of skilled workers from other countries contribute significantly to growth and jobs. We are an open society and we want to stay that way," Kempf said.
"An allegedly homeland-loving nationalism that declares everything foreign an enemy is wrong," he said. "It poses a threat to the business model of our industry which is based on openness - and it's jeopardising prosperity and employment."
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While Europe's biggest economy has been growing for nine years and could continue expanding, Kempf said it was urgent that Germans now take steps to prepare for the possibility of a downturn: "We have to take precautions - now."
"The trade policy of U.S. President Trump, but also the approaching Brexit are dampening investment activity worldwide and with it German export business," Kempf said.
The German economy, with its export-oriented manufacturing sector and an overall export quota of nearly 50 percent, faces a threat from global business and trade uncertainty, Kempf said.
On the one hand, the global economic recovery has reached its peak, leading to less dynamic demand for German equipment. "On the other hand, German companies are facing risks with each protectionist measure - even if it is targeted against China."
China is Germany's most important trading partner and the United States is its biggest single export destination. An escalating tit-for-tat tariffs dispute between Washington and Beijing is therefore hitting German exporters as well.
"The United States and China must urgently de-escalate the conflict," Kempf said, adding it was high time to strengthen the World Trade Organisation (WTO) by modernising its rules framework and improving its monitoring mechanisms.
Kempf's comments chimed with the IFO business climate survey released on Monday, which showed morale holding steady even as the manufacturing sub-index dipped and companies scaled back their overall expectations slightly.
"BREXIT DAMAGE"
The German growth outlook is also clouded by an impasse in Britain's negotiations with its European Union partners over the conditions of its departure from the bloc next March. Britain is Germany's fifth most important export destination.
Kempf said there must be a breakthrough on getting a Brexit deal in the coming weeks to ensure a transition period that would give firms legal certainty until the end of 2020.
"Even this amount of time will hardly suffice to negotiate a free trade agreement as the United Kingdom envisages," he added.
BDI Managing Director Joachim Lang said the recent developments regarding Britain's decision to leave the EU were dangerous. "This will cause damage," Lang warned.
The BDI called for lower corporate taxes, higher public investments in education and digital infrastructure as well as a completion of the European Union's single market by harmonising rules in areas such as services, energy and digital business.
(Additional reporting by Gernot Heller,; Editing by Maria Sheahan, Alison Williams and Peter Graff)