The largest European economy and locomotive of industrial production, the famous German economy recorded a contraction of the economy in the first quarter of 0.3 percent. After a drop of 0.5 percent in the previous three months, conditions have been met for the declaration of a technical recession, writes Danas.
The German economy thus returned to the pre-pandemic level, i.e. to the level of economic activity from 2019. This is not only not good news for Germany, but also for other smaller economies that rely on this large economy, including for Serbia.
The most important connection between our economy and the German economy is that this country is by far the biggest trading partner of our companies. It participates in total exports with 14.5 percent in the first three months of this year, and in imports with 12.5 percent.
True, the data for the first three months show that exports to Germany are growing at a rate of 26.7 percent compared to the same period last year, and exports exceeded one billion euros in three months. Imports are also growing, but somewhat slower, 17.4 percent in three months and amounted to 1.2 billion euros.
Germany’s influence on our economy is investments
Another important channel of German influence on our economy is investments. German companies in Serbia employ almost 80,000 people and make up an important part of our manufacturing industry, especially in the automotive sector where dozens of German factories make components for cars.
Again, in the first three months of this year, according to NBS data, the inflow of foreign direct investments was even 42 percent higher than in the same period last year, although it should be remembered that FDI practically stopped in March last year due to the start of the war in Ukraine.
The net Inflow of FDI from January to the end of March this year was 784 million euros.
Svetozar Tanasković, a professor at the Faculty of Economics in Belgrade, points out that the drop in production for the second quarter in a row in Germany can have negative effects on the Serbian economy, bearing in mind that Germany is Serbia’s largest foreign trade partner.
“Inflation in Germany in the first three months of 2023 averaged 8.27 percent and had the greatest impact on the decline in overall activity in this quarter through the drop in household consumption.
Although other economic indicators in Germany, such as indicators of the labor market and investments, continue to record positive trends, exports in March and production in the automotive industry recorded a significant decline.
Germany is the largest economy in the EU and the third largest in the world
As a result, the announcements that Germany could record a slight growth in the second quarter are now in doubt. As Germany is the largest economy in the EU and the third largest in the world, the continuation of negative trends would spread to other economies, and thus to Serbia. The biggest threat to the expected growth of the Serbian economy in 2023 is the slowdown in exports and the postponement of investments due to fears of foreign investors about the spread of the recession in Germany.
For now, we have no data suggesting that something similar is happening in Serbia, and only in the third quarter will it be certain whether something like that can happen by the end of the year,” explains Tanasković.
According to Ivan Nikolić, member of the Council of Governors of the National Bank of Serbia and editor of Macroeconomic Analysis and Trends (MAT), the strongest impact of the crisis in Germany on us is through the export-driven manufacturing industry.
“Germany is our most important export partner and their slowdown must have bad consequences for us as well. The biggest problem, in my opinion, is that even in the medium term there is no room for a reversal of trends for the German economy,” Nikolić said pessimistically, stressing that it is not just about stagnation, but a drop in the economy to the level of the second half of 2019.
He also recalls that at that time the German economy, and above all industry, was on the verge of recession, but then the covid pandemic came and that was used as an excuse for worse results.
“They went back 3.5 years and now they have even more unfavorable prospects. In the meantime, they lost the market of the Russian Federation, the Turkish economy, which is a very important market for Germany, weakened, and finally there is high inflation in the Eurozone itself, which led to a real drop in consumption,” explains Nikolić.
The EU has failed to keep pace with the US and China
In the long term, the limitations that faced them have not been removed, primarily the lack of manpower and the loss of technological advantage compared to the USA and China.
“The EU failed to keep up with the US and China in that green transition and economy. The EU does not seem to have enough comparative advantages and resources to provide this now. It seems that this stagnation will last, at least until the end of the war in Ukraine,” Nikolić assesses.
“And if it’s bad for Germany, it can’t be good for us either,” he concludes.
Nikolić points out that it is particularly important for us how the German industry is doing, and according to him, if 2015 is used as a benchmark, it had the slowest growth in Europe except BiH.
“It’s almost a decade of stagnation. Their service sector somewhat compensates for the bad results of the industry, but for us it is the industry that matters, since our factories are part of the supply chains of their industrial capacities,” he notes.
A risk to our economy in perspective
Nikolić points out that exports to Germany are still going, but they would be much higher if their conjuncture was better.
“It is a risk for our economy in perspective. How can we count on the acceleration of economic growth when our main channel is limited. They are the locomotive of the industrial development of Europe, but unfortunately it does not look good there for now. A serious deindustrialization of Europe is even expected,” warns Nikolić.
Nevertheless, for us, a positive circumstance from turbulent geopolitical events is the influx of investments from the so-called “nearshoring” process.
“It’s the extraction of production capacities from Asia closer to the Eurozone, and part of those investments end up here as well, and that’s a source of new exports,” notes Nikolić.
He also ad”s”that until 2017, our industry was directly dependent on Germany, but that since then there has been a certain separation, and that the correlation of industry movements is not so direct.
“This is partly due to the arrival of Chinese companies, partly due to a better structure of the production of products with a higher processing stage. However, they are still without a doubt our most important economic partner. If it’s bad for them, it can’t be good for us, but at least it won’t be that bad,” he notes.
He does not expect a significant drop in remittances from Germany, because according to him, the problem there is not a lack of money, but that exports are not progressing sufficiently.
