Germany’s technical recession and its impact on Latvia’s exports

Latvia’s third largest export market, Germany, has recorded a technical recession – GDP in this country has decreased for two quarters in a row.

With Germany experiencing the biggest economic recession since 1991, the experts of the international risk management company “Coface” cite the decline of private consumption and high inflation as the main reasons, and predict stagnation for the German economy. For Latvian industry, for which Germany is an important export market, these are alarming signals that do not predict a quick recovery.

According to the latest data, in the first quarter of 2023, Germany’s GDP decreased by 0.3 percent compared to the situation in the fourth quarter of 2022, when a GDP decrease of 0.5 percent was also recorded. Apart from 2020, when economic processes across Europe were affected by pandemic restrictions, this is the first technical recession in Germany since 2012-2013. year

The value of Latvia’s exports to Germany in 2022, according to the data of the Central Statistics Office, reached 1432.9 million euros, while in the first quarter of this year, the value of exports reached 355.13 million euros. The amount of Latvian exports to Germany in 2022, compared to the situation a year earlier, has increased by 19.67%. Thus, the recession in the market of such an important trade partner can also negatively affect Latvian companies, especially in the production sector, according to “Coface” economists.

“Nearly a fifth of Latvia’s exports to Germany are made up of furniture, wood and wood products. As private consumption declines, producers of these products are among the first to suffer. Latvians also export to Germany electrical equipment and mechanics, chemical industry products, mineral products, vehicle parts and food, including dairy products, so the drop in consumption in such an important market for Latvia affects a large part of Latvian exporters, says Mindaugs Sventickas, head of “Coface Baltics”.

According to “Coface” economists, several factors contributed to the fall in German GDP. The main one is private consumption, which decreased by 1.2 percent in the first quarter of this year (after price and seasonality adjustment), but in the fourth quarter of 2022 it even decreased by 1.7 percent. According to economists, this is the biggest drop in consumption in Germany since 1991, not taking into account the situation during the 2020 pandemic restrictions.

The main reason for the decline in consumption is high inflation and, therefore, a decrease in purchasing power. In the first quarter of 2023, consumption significantly decreased in the food and beverage, clothing and footwear, as well as furniture sectors. In addition, the demand for passenger cars also fell significantly, which until the beginning of this year was also stimulated by the generous support mechanisms for the purchase of hybrid cars and electric cars.

Although “Coface” experts also note some positive signs in the German economy, their potential impact is not sufficient to express more optimistic GDP growth forecasts. The data showed that exports of goods and services rose slightly by 0.4% quarter-on-quarter, driven by strong exports from the metals industry and the plastics industry. At the same time, imports fell by 0.9 percent compared to the previous quarter, affected by lower demand for fuel and crude oil, as well as chemical products.

According to economists, several factors will threaten the German economy in the coming quarters. Although the salaries of the country’s citizens in the first quarter of 2023 were on average 9% higher than in the previous period, this increase was “eaten up” by 8.2% inflation. The fact that in the second quarter of this year the salary portion of the employed will increase again – new collective agreements have entered into force in some companies, which provide for a 9.5% salary increase. However, the increase will not affect all workers, so overall wage growth in Germany will be lower, with average inflation forecast at 5.5% (with a downward trend). As a result, Germany’s purchasing power will increase slightly this year. It is true that in such conditions it is not clear how consumer behavior will change – whether economic uncertainty and inflation will encourage more savings and less consumption.

Germany’s foreign trade outlook also remains uncertain. While demand in Europe is slowly picking up, exports to China, Germany’s biggest trading partner, are still falling, even after the “zero Covid” policy ends. Forecasts show that it will take time for German car and machinery companies to feel the Chinese economic recovery. Consequently, Germany’s economic growth prospects remain uncertain. Although modest growth is expected, it will only be enough to keep the German economy stagnant in the coming quarters, according to economists.

“When communicating with exporting companies and offering recommendations on how to reduce the risks caused by customer insolvency, we always recommend not only diversifying export markets, but also the transaction currency. Usually, this practice helps Latvian manufacturers to survive the economic downturn more calmly,” says M. Sventickas.