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By Andreas Rinke
BERLIN (Reuters) -Germany's conservatives under chancellor-in-waiting Friedrich Merz on Tuesday looked set to reach a deal with the centre-left Social Democrats (SPD) to form a government aimed at reviving growth in Europe's largest economy despite global turbulence.
Two sources told Reuters that decisive talks could take place on Tuesday and a deal could be reached on Wednesday, echoing a Bild newspaper report saying there was determination to reach a deal on Tuesday.
Merz's Christian Democrats (CDU) will head the new administration alongside their Bavarian CSU sister party, with the SPD as junior partner.
The government will take charge at a time of global turbulence in an escalating trade war sparked by U.S. President Donald Trump's sweeping import tariffs, which could stoke inflation and have raised fears of a global recession.
Merz, who called Trump's U.S. an unreliable ally after winning the election in February, has also vowed to build up defence spending as Europe faces a hostile Russia, and to support businesses struggling with high costs and weak demand.
German economic institutes have cut back their forecast for this year's growth to 0.1% from the 0.8% they had expected in September, sources told Reuters on Tuesday.
Germany has endured two years of contraction already and the tariffs are a sharp blow to its highly export-focused economy.
Merz's coalition would be the only possible two-party majority that excludes the far-right Alternative for Germany, which all other parties have pledged to shun, even though it came second in the election.
Merz this week told Reuters that Trump's tariffs underscored the need for Germany to rebuild its competitiveness, after a bruising period in which the AfD drew level with his conservatives in an opinion poll for the first time.
Soon after winning the election, Merz pushed through a constitutional amendment that would allow him to unleash a borrowing bonanza to fund a big boost in defence and infrastructure spending.
But the move, while providing his new government with a massive windfall, received criticism from some of his own supporters for pivoting away from a promise of fiscal rigour.
In a new poll by the Forsa institute, 60% of respondents said Merz was not fit to be chancellor, including 28% of CDU/CSU voters.
(Reporting by Andreas Rinke, Writing by Friederike Heine and Matthias Williams; Editing by Rachel More and Miranda Murray)
