Germany’s economic vulnerability is raising alarm in neighbouring countries from Switzerland to Poland, leading some foreign economists to advocate for reforms in the eurozone’s largest economy to curb the spread of the downturn.
The International Monetary Fund (IMF) has lowered its projections for German GDP growth by 0.3% for both 2024 and 2025.
It now anticipates growth of only 0.2% this year, marking the lowest among its major eurozone counterparts.
“Without economic stimulus from Germany, Austria will struggle,” states Gabriel Felbermayr, director of the Austrian Institute of Economic Research Wifo.
In 2023, the bilateral trade volume between Germany and Austria decreased by 8%.
Germany remains Austria’s primary trading partner, with nearly 30% of exports going to its larger neighbor, constituting 12% of Austria’s gross domestic product, as stated by Felbermayr.
“This means that Germany’s weakness is having a direct negative impact on the Austrian economy,” Felbermayr said.
“Mechanical engineering, chemicals, the metal industry and the automotive sector are particularly dependent on the German economy.”
In Switzerland, where Germany is also the primary trading partner, the situation mirrors that of Austria. Martin Mosler, head of financial policy at the Institute for Swiss Economic Policy IWP, remarked, “When Germany suffers a hiccup, Switzerland notices it too.”
Swiss exports to Germany experienced a 1.1% decline in the first quarter, following a previous downturn at the end of 2023.
Mosler highlighted the impact across various sectors, ranging from luxury watches to intermediate products supplied by many highly specialized SMEs, particularly those in the electronics industry.
Last year, Germany’s economic downturn had repercussions on Poland’s industrial sector.
Paweł Sliwowski, director of the Polish Economic Institute PIE, noted that production in energy-intensive industries like chemicals or metal casting has declined by approximately 15% to 20% since Russia’s invasion of Ukraine in February 2022.
Sliwowski emphasised the close integration of these sectors into German supply chains.
Additionally, there has been only minimal growth in the activity of consumer goods producers during this period.
“Production of furniture or other household appliances has remained largely unchanged since 2022 due to lower foreign demand,” Sliwowski said.
“On average, 27% of total Polish exports go to Germany.
“From Poland’s point of view, a more appropriate policy for the German government would be to increase public investment,” stated Sliwowski.
Wifo director Felbermayr made a similar appeal.
“In Germany, investment activity must get going again. This requires effective short-term stimuli,” he declared, adding that Berlin must also do more to get long-term growth back on track.
“It would probably be particularly effective if it were to advocate an ambitious deepening of the EU single market for financial services, energy, and telecoms,” states Felbermayr.
REUTERS
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