UPDATE 2-Trump, Brexit bite into German growth outlook - BDI

Germany's BDI industry association on Tuesday lowered its 2018 growth forecast for Europe's largest economy, citing weaker demand for German goods due to increased business uncertainty caused by U.S. President Donald Trump's trade policy and Brexit.

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.

"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.

Weighing into the debate about rising extremism in Germany after footage of violent xenophobic protests in the eastern city of Chemnitz in the past weeks was seen around the world, Kempf said hate against foreigners and nationalism was harming the country's economic self-interest.

The German economy with its export-oriented manufacturing sector and an overall export quota of nearly 50 percent are also facing an increasingly serious threat, Kempf said.

On the one hand, the global economic recovery has reached its peak, leading to less dynamic demand for German machinery and equipment, Kempf said. "On the other hand, German companies are facing risks with each protectionist measure - even if it is targeted against China," Kempf said.

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 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.

"PREPARE NOW"

Kempf said Germany's economic upswing was now in its ninth year and it could even continue for a while. "Nevertheless, Germany must prepare for the downturn. We have to take precautions - now," Kempf warned.

His 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.

The BDI head 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 harmonizing rules in areas such as services, energy, and digital business.

With deep divisions over migration spilling over into far-right protests in Chemnitz after migrants were blamed for the fatal stabbing of a German man, Kempf issued a warning about how hating foreigners could hit the economy.

"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.

In a thinly veiled attack against the far-right Alternative for Germany party, which is gaining popularity in the polls, Kempf added: "An allegedly homeland-loving nationalism that declares everything foreign an enemy is wrong.

"It poses a threat to the business model of our industry which is based on openness - and it's jeopardizing prosperity and employment."