The Strategist

Europe’s largest economy is slowing down

01/17/2019 - 11:58

The political environment is putting pressure on German exports, the main engine of the German economy, and threaten it with a technical recession.

After a decade of economic boom, thunderclouds appeared in the political sky. They are beginning to increasingly affect the state of the global economy. So, the forecast for its growth for this year, according to Consensus Economics, is below 3% for the first time in the last ten years.

The economy of Germany, the fourth economy of the planet, is no exception. Europe's main economy, based on exports, the amount of which is 1.6 trillion euros, is also fully experiencing the increasing pressure of the political superstructure. 

A poll of the confidence of German businessmen, conducted by the Munich company Ifo in December last year, showed the lowest result since 2016.

“Companies around the world are reluctant to order new machines and equipment,” explains Ulrich Ackermann, executive director for international trade of the German Engineering Union of VDMA. “Companies invest only when they are optimistic about the future. Meanwhile, we have come to the end of the economic cycle after a decade of growth.”

Exports are everything for Germany." Their share in the GDP of the country is 47.2%. This is the highest figure among the major world economies. Statistics show that trade has been the main source of GDP growth in the past decade. Consequently, the decline in exports may throw the German economy into a technical recession, occurring with two quarters of negative growth in a row. Germany hopes that this will not happen, at least for now. On Tuesday, the Federal Statistical Agency (FSA) published preliminary data, but there are no export data for the last three months of 2018. Last year, Germany’s GDP grew by 1.5% compared with 2017. By the way, in 2017 the growth was greater - 2.2%.

In the third quarter, the German economy showed a negative growth for the first time after 2015. The decline in the fourth quarter, according to preliminary figures, has stabilized. Many economists hope that this is a temporary phenomenon, and explain it by the fact that German automakers do not have time to fulfill the new EU emission requirements. However, the purchasing power index, often used as a litmus test for forecasts for the development of the economy, says that the situation has hardly improved in the fourth quarter.

The index of German engineering companies in December fell to the level of 2012. The Germans began to realize that their economy is not only driven by cars, and that exports are generally under strong pressure.

Most German companies are now afraid of the trade war between the United States and China. Hard Brexit is yet another concern of most of German businessmen.

German business is also worried about lack of unity in the euro zone, fueled by the movement of "yellow vests" in France and a high probability of a collision between the markets and the populist government of Italy.

Certainty, understanding of the game’s rules is extremely important for business. Therefore, German businessmen most of all want clarity and certainty from world leaders. This uncertainty does not exist in the United States or in China. By the way, due to a decrease in German exports to China last year, the entire export of Germany fell mainly. The Eastern country is the largest trading partner of Germany. It is not surprising that the German economy behaves in the same way as the Chinese - when there are problems in the PRC economy, the first European economy is reeling.

The growth of German exports to the PRC in November 2018 decreased to 4% compared with November 2017. Meanwhile, in the earlier months of last year, it amounted to double digits.

The German auto industry is feeling particularly bad in China. Last year, the PRC recorded the first decline in car sales in nearly three decades of growth. The confidence of about 5,200 German companies operating in China, according to the German Chamber of Commerce, is declining. Moreover, it is not only about auto giants.

The manufacturer of industrial robots Kuka AG, bought in 2017 by the Chinese company Midea Group, warns that the "cooling" Chinese economy adversely affects the company's operations.

The world's second largest manufacturer of sportswear Adidas AG also expects a decline in activity in the PRC in the last quarter of last year. Meanwhile, China is the third sales market for this company after Western Europe and North America with revenue in 2017 of approx. 4 billion euros.

However, most German businessmen hope that the slowdown in the development of the Chinese economy, and therefore the German economy, is temporary, and they continue to invest large sums in it. Thus, the chemical giant BASF, for which China is also the third sales market, despite the decline in profits, is investing $ 10 billion in the construction of the first fully foreign chemical plant in the Middle Kingdom in Guangdong.