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Wednesday, October 9, 2024

Things are going badly in the German state. “Existential threats”. Recession on the doorstep

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Volkswagen on Wednesday, September 25 starts negotiations with trade unionists on the subject of wages. As he notes Reuters Agencythese talks should show “how aggressively Europe's largest car manufacturer will pursue layoffs and potential factory closures in Germany.” Because the company, “the jewel in Germany's crown”is in serious trouble. At least that is what the announcements that shook Germany in early September indicate. Volkswagen announced that is considering closing two factoriesbecause its cars are not selling as well as they did in the not-so-distant past. This would be the first such move in history.

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Volkswagen is not only an economic symbol of Germany, but also its mirror – what troubles the giant also troubles the entire country. – This is one of the pillars of the German economy.which is based on the chemical, automotive and machinery industries. Only that the chemical and machinery industries also create products on thing automotive industry, which is the jewel in Germany's crown. Therefore, its situation determines the situation of the entire German economy. In other words: automotive It is a barometer of the German economy, said Dr. Konrad Popławski from the Centre for Eastern Studies recently in an interview with Next.gazeta.pl.

– The German economy has been struggling in recent years an increasing number of existential threats – comments for Next.gazeta.pl Piotr Bujak, Chief Economist of PKO BP. And he immediately explains the causes that lie in the recent past (although before the war in Ukraine). He emphasizes that the problem started with trade wars between USA and China (This was very visible during Donald Trump's presidency). They resulted in a permanent weakening of the growth rate of the Chinese economy, which in turn limited Chinese demand for German goods.

The stagnation in the Chinese economy continues, which is hitting the German export sector. At the same time, Germany has to face Chinese competition more often than in the past. China is no longer just a cheap supplier of components and semi-finished products. It has become a manufacturer of technologically advanced and good quality consumer goods. This is particularly visible in the case of electric cars, where German and American manufacturers are losing the competitive battle with companies from the Middle Kingdom. VW is feeling this particularly strongly

– notes Bujak.

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Germany is in trouble

Europe's largest economy is constantly receiving disturbing signals. The latest one concerns the economic sentiment indicator Ifo. Index reading for September fell the fastest in seven months – to 85.4 points from 86.6 points in August. This negative surprisebecause experts expected a smaller decline, in line with the trend visible since June. The Ifo index, based on surveys of around 9,000 managers, shows how activity in German business looks like.

Sentiment deteriorated in all sectors except construction. In the case of industrial processing the reading is the lowest in over four years (since June 2020). Pessimistic assessments concern both the current situation and future prospects. “The German economy is coming under increasing pressure” – notes the Ifo Institute itself, publishing data on social media.

Structural problems

This is another in a series of indicators suggesting that the German economy will shrink in the third quarter and the country will be hit by a technical recession. It is marked by two consecutive quarters of GDP declines on a quarter-on-quarter basis, with a decline in the second quarter, at 0.1 percent. Similar gloomy signals came on Monday, when we learned the preliminary readings of the indicator PMI – both collectively and divided into the industry and services sectors.

According to them, the general activity in German business fell the most in seven monthsto 47.2 points from 48.4 points in August. Any reading below 50 points suggests recessionary sentiment. In Germany, this is visible primarily in industry, where the PMI fell to 40.3 points. Services are still “in the black”, although only just barely (50.6 points). All these readings are weaker than expected.

What do the experts say?

The head of the German central bank criticized the focus on negative aspects of the economy's condition. Joachim Nagelsome of the factors weighing on GDP, such as inflation or high interest ratesis temporary. “We therefore assume that the German economy will slowly regain some dynamism,” he said. But it is not just about temporary factors. Nagel himself admitted in the same speech that Germany is struggling with many structural challenges, such as fuel costs, bureaucracy and a lack of skilled workers.

This is emphasized, for example, by the chief economist of Commerzbank. Joerg Kraemer, commenting on the Ifo reading, wrote on X: “Since 2018, companies have generally assessed their current business situation as getting weaker. This shows once again how structural problems are evident“.

After years of government policy in Berlin, which led to companies on the Rhine becoming dependent on cheap gas from the east, Moscow's aggression against Ukraine and sanctions imposed on Russia have taken away an important competitive advantage for Germany in the form of cheaper energy. Thus, the growth model of the German economy, which was largely based on building cost competitiveness on the basis of cheap energy resources from Russia and directing a large part of the export of investment and consumer goods to China, has collapsed. Adjusting to the new reality is now painful. Rebuilding the model of functioning of the German economy and changing its structure may take several years.

– says Piotr Bujak from PKO BP.

Recession in Germany, and that throughout the yearthe entire group of economists expects it. As Reuters reported, citing sources, major german economic institutes lowered their forecast for this year and now expect GDP to fall by 0.1% in 2024. If the forecast is confirmed, it will be Germany's second full year of recession. Europe's largest economy shrank by 0.3% in 2023.

What does this mean for Poland?

Germany is not only a very large economy, but also an important country for Poland. It is a key trading partner for our country, so German problems and a drop in demand among local companies may translate into problems for Polish exporters. – It is worth emphasizing, however, that our economy is by far the largest in the region, has the largest domestic market and its sensitivity to a weakening of German demand is relatively small – emphasizes Piotr Bujak. The automotive industry in Poland is less dependent on the German one than in other Central European countries.

The presence of German car manufacturers in our automotive industry is smaller than, for example, in the Czech Republic, where VW strongly dominates. The factor that gives Poland relative independence from negative trends in the external environment is the inflow of EU funds. This drives the Polish economy regardless of the economic situation in Germany and the entire global economy.

– says the chief economist of PKO BP.



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