A hard Brexit would result in extra tariffs of more than €3 billion for German companies per year, a German institute said today, adding that German exports to Britain could drop by up to 57%.

Talks on ending four decades of Britain's membership in the European Union have entered their final stage, more than two years after Britons voted narrowly for Brexit in a referendum. 

Britain and the EU are eyeing significant progress in negotiations at an October 17-18 summit. 

The IW economic institute in Cologne said a hard Brexit would hit the auto sector - which employs some 800,000 people in Germany and is the country's biggest exporter - particularly hard as it would be hit with around 60% of those extra costs. 

IW said around 5% of Germany's gross domestic product depended either directly or indirectly on trade with Britain, making it the third most important trading partner for German firms.

"That could dramatically change in the foreseeable future," IW added.

Referring to a potential plunge in German exports to Britain if a hard Brexit happens, IW researcher Markos Jung said: "This horrific scenario should force politicians to act constructively."

In the long term, a hard Brexit would probably result in price rises and a shift in Germany's flows of goods, the IW said.

Meanwhile, German exports unexpectedly fell in August, data showed today, in a fresh sign that manufacturers in Europe's largest economy have shifted into a lower gear over the summer months. 

The Federal Statistics Office said seasonally adjusted exports edged down by 0.1% on the month, missing a Reuters forecast of a 0.3% rise. 

Imports dropped by 2.7%, undershooting a predicted 0.2% fall. 

The seasonally adjusted trade surplus widened to €18.3 billion in August from €15.9 billion in the previous month, the data showed. 

Germany's wider current account surplus, which measures the flow of goods, services and investments, rose to €15.3 billion from €15.1 billion in July, unadjusted data showed.

The trade figures chimed with manufacturing data released yesterday that showed industrial output edged down unexpectedly in August, suggesting the German economy lost steam in the third quarter. 

Economists are taking an increasingly pessimistic view of the German economy, with the top German institutes last month revising down their 2018 growth forecast.

They warned that an escalation of trade friction involving the US could cause a major recession in Germany and Europe. 

A source has also told Reuters that the government will revise down its growth forecasts for this year and next. The government is expected to announce its updated growth projections on Thursday.