Germany’s Woes Cast a Shadow on the Hungarian Economy

The weakness of the German economy is a major challenge for export-dependent countries of Central Europe. For years, regional cooperation with the German automotive industry has been a huge driving force for the states in the region. Now, however, the German locomotive has stalled and the region’s growth prospects are deteriorating, reported Világgazdaság.

The situation is exacerbated by geopolitical risks, most notably the war in Ukraine, but German exports are also affected by the conflict in the Middle East and rising protectionism.

The economic turmoil in the Central European region’s main trading partner and the persistent weakness of the automotive sector risk a further economic downturn in the CEE region – Dawn Holland, economic research director at Moody’s Analytics, told Reuters.
Central Europe was hit by a wave of inflation last year, with central banks forced to raise their benchmark interest rates to 20-year highs, causing a sharp fall in real wages that has already been reversed in Hungary, for example, by falling inflation and a central bank rate-cutting cycle. But in the Czech Republic, real wages have been falling for eight quarters in a row.

German companies had annual sales of around €250 billion in Central Europe in 2021 and directly employed around one million people, according to the Bundesbank.

The Czech Republic depends on Germany for a third of its exports, Hungary for a quarter of its exports, and the German relationship accounts for 20 percent of Slovak exports,

according to an analysis by S&P Global. Poland is less exposed, has a large domestic market and Polish exports are less dependent on car manufacturing.

For the majority of companies surveyed by Reuters, the best scenario would be stagnation in sales this year, although some did not rule out a complete drop in revenues and possible job cuts. DGA Gépgyártó és Automatizálási Kft, a Hungarian company that manufactures steel structures, welded components and custom-built machinery, has planned a 50 percent capacity expansion between 2023 and 2025 to meet the expected increase in demand, based on feedback from customers. This (higher) demand has evaporated – said Tamás Tornai, managing director of the holding company that controls DGA.

The German automotive industry is not only struggling with the weakness of the US and European markets, but also with the continuing high cost of energy and the global shift to e-mobility.

Within Central Europe, Hungary is leading the way in investment in battery and electric car manufacturing, especially Chinese capital inflows – positioning itself as a meeting point for Eastern and Western investors.

Demand in the automotive industry has fallen very sharply, driven by inflation, high interest rates and economic uncertainty – said Tamás Mogyorósi, head of business development at the Fund Group. Otto Danek, vice-president of the Czech Exporters’ Association, said the sector could see a sharp slowdown from the second half of 2023 due to weakness in Germany. A relatively small drop in demand from this region will have a strong impact on the export segment as a whole – said Danek.

Germany’s prolonged weakness is one of the main risks we see for the Central and Eastern European region – says Karen Vartapetov, senior analyst at S&P Globa. This could hamper medium-term growth in CEE and continue to hamper already challenging fiscal consolidation plans, she added.

Via Világgazdaság; Featured Image: Pixabay