Birds fly over an industrial area during sunrise in Frankfurt am Main, western Germany, on early January 30, 2024. Image for representational purposes only.
| Photo Credit: AFP
The sickly state of the German economy is the next big challenge for the export-reliant countries of central Europe, which are still recovering from some of the world’s worst inflation spikes in the wake of the COVID-19 pandemic.
Close trade ties with Germany and its once-mighty auto sector were for years a boon for the region since the collapse of communism. But now those ties risk becoming a drag on the economies of Hungary, Czech Republic and Slovakia.
Already, some local companies reliant on ties with Germany are trying to tap deeper into other overseas markets and branch into industries like defence to mitigate the weakness of their large western neighbour, where another year of near-recession looms.
Geopolitical issues
However such efforts come at a time of major geopolitical uncertainties, with the Ukraine war, Middle East conflict and rising protectionism. Despite the push into the defence sector, all of these factors could hamper the efforts of the region’s companies.
“Economic disruption in the region’s most important trade partner, and persistent weakness in the auto sector, pose additional risks of economic setback to the CEE region,” said Dawn Holland, Director, Economic Research at Moody’s Analytics.
Central Europe’s inflation surge, led by eye-watering levels at 25% in Hungary last year, has prompted central banks to lift borrowing costs to their highest in two decades, with Czechs enduring the most sustained fall in real wages, now spanning eight successive quarters.
German companies had annual turnover of some €250 billion ($270 billion) in central Europe in 2021, employing about 1 million people directly and many more through suppliers, according to Germany’s Bundesbank.
The Czech Republic and Hungary rely on Germany for a third and a quarter of exports respectively, with Slovakia sending a fifth of its exports there based on a tally by S&P Global. Poland is seen less exposed because of the strength of its more diversified local economy, with exports less dependent on car making.
Stagnation in turnover
The best scenario for most firms interviewed by Reuters would be stagnation in turnover this year, though some did not rule out an outright decline in revenue and possible job cuts.
Building on feedback from clients, Hungary’s DGA Gepgyarto es Automatizalasi Kft, which makes steel structures, welded components and custom manufactured machinery, had been planning a 50% capacity expansion to meet the expected growth in demand over three years from 2023 to 2025.
“This (higher) demand had evaporated,” Tamas Tornai, Executive Director of the holding company that controls DGA told Reuters. Even so, DGA is going ahead with its 2.5 billion forint ($6.95 million) expansion to serve the booming defence industry.
Wiped out
Germany’s car sector is not only struggling with weak sales in U.S. and European markets but obstacles from high energy prices to the global shift to e-mobility that is forcing a rethink of the future of internal combustion engines.
Within central Europe, Hungary has led a charge in attracting investments in battery and electric car manufacturing from China, positioning itself as a meeting point for Eastern and Western investors.
“There is a very strong decline in car sector demand, caused by inflation, interest rates and economic uncertainty, which nearly wiped out private buyers from the market,” said Tamas Mogyorosi, Business Development Manager at Alap Group. Rating agencies say the weakness could complicate efforts to rein in budget deficits, which S&P Global says will remain ‘exceptionally wide’ in historical terms for the region this year.
