Germany has just escaped another technical recession and the economic indicators point at least to a further stabilization. Is it therefore possible for the export-oriented country to go up again in 2020? Or will other regions have to join in so that the industrial sector of the former export world champion can get back on its feet? Probably yes, it needs the support of others, as the following data and facts suggest.
The effects of the trade dispute to date
Germany, as an export country, is clearly suffering greatly from the consequences of a trade dispute that has caused industrial production in many countries to shrink. This is reflected in the production figures in the manufacturing sector, which had fallen for over a year and a half. On the other hand, they are still profiting from the current economic situation in the USA. They took over part of the declines from the dispute between the USA and China, with the result of a growing trade deficit with the United States. Much to the displeasure of US President Trump. However, he cannot build a second trade war zone now, less than a year before his big election goal.
China’s importance for Germany and the world
The rise of China, especially after the financial crisis (in 2010 it became number two in the world) has brought many states into an economic dependency with the giant nation. According to statista, the share of the world’s gross domestic product, adjusted for purchasing power, was already over 18 percent in 2018. For 33 countries China is the most important sales market and for 66 countries China is the most important importing country. This is particularly true for Germany, as current studies show again. Although consumption is also booming in Germany. It accounts for about half of the German economy and thus less than in the USA with its much quoted 70 percent. But there is another serious difference, as the economist from the Federation of German Industries (BDI), Annika Mildner, points out:
Germany’s dependence on international trade, i.e. exports and imports combined, would account for 87 percent of GDP. In the USA, this would be a comparatively low 27 percent. That’s why the US “island of consumption” is considered to be so safe. This means that Germany’s economy is also the main leader when tariff barriers are erected somewhere. Not a very new insight. And since we are once again talking about China’s importance for Germany:
According to a recent study by the German Chamber of Commerce, 83 percent of companies operating in China already feel directly affected by the trade dispute, compared with only 30 percent in 2018. The German automotive industry is once again at the forefront of this trend. Almost 70 percent expect the market to deteriorate in 2020.
The most recent figures from the Chinese statistics office on Friday, which reported a further decline in China’s industrial production in October, also add to this. A decline to 4.7 percent and a contraction in car sales in October, now the 16th month in a row. Incidentally, the constant bad news is disproving the view of many that China doesn’t need a deal and could just sit out the dispute with the US.
What does this mean for Germany? We only need to look at the sales figures for the German automotive and mechanical engineering industry in China in 2018:
- VW sold almost half of its new vehicles in China, while Daimler and BMW sold 28 and 25 percent, respectively.
- A gigantic automobile market with a volume of almost 24 million vehicles sold and significantly larger than the entire European market with 15.6 million units.
- In the machinery and plant engineering sector, eleven percent of exports went to China
Overall, China was the major engine for the German export-driven economy. Trade volume with China has doubled since the financial crisis. The dispute over economic supremacy is and will remain a topic for Germany as an industrial location. In fact beyond the turn of the year, because it affects its business model to its very foundations.
After the financial crisis, China lifted the global economy out of its lows with a debt-financed infrastructure programme. Almost one third of global growth is likely to be attributable to this construction boom. This also applies to German export growth. This has created a dilemma for German economic policy. We are sitting between the chairs, caught up in the trade dispute and the demands of both sides.
Chancellor Merkel is once again attempting to do so with diplomacy and no clear definition. She is very clearly recognizable in her decision to build the 5G network. No exclusion from Huaweis’s flagship tech company, despite strong security concerns from all sides. This company inevitably had to become the focus of the China-American dispute. The Chinese have meanwhile become the big player worldwide in telecommunications solutions (> 30 percent). It is also estimated that half of the Germans use their technology without knowledge.
These are therefore not simple decisions in major economic policy. Gabor Steingart has summed up this dilemma very well in a morning briefing:
“There are good reasons to question the German business acumen. We believe that the cooperation with China, which extends across all industries, is a profitable business. However, we may not only sell cars, pharmaceuticals and machine tools, but also ourselves.”
This does not change the fact that the German economy can only grow next year if the trade dispute between the two big players does not continue. The Dax is, as we have often called it, a “call to the world economy“. This is clearly dominated by the development of number one and two.
At the moment, however, the stock market is playing the scenario “easing on all fronts” and the low interest rates will do the trick…