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A recession in Germany could mean economic damage for these countries

The German economy has lost steam and that could shake other euro zone countries too, including Italy, France, Poland and Spain.

Data out Monday showed the manufacturing sector in Germany has weakened over the last couple of months, adding to other gloomy indicators, with economists considering whether a recession is on its way. If this were to materialize, the entire euro zone would be at risk, given the importance of the German economy to the region.

“We do expect the second quarter to be weak,” Florian Hense, a euro zone economist at Berenberg bank, told CNBC via email. He forecasts zero growth for the current quarter in Germany, but a small pickup to 0.2% in the third quarter. Germany grew at a rate of 0.4% in the first quarter of the year — after narrowly missing a technical recession at the end of 2018.

Hense explained that countries in the region are struggling already, namely Italy, and those that are doing better but have close industrial ties to Germany — such as Austria and Eastern Europe — would be “particularly vulnerable to a German recession.”

“The more an industry-led German recession would spread to the domestic side of the economy, France, Spain and tourism spots in the south (of Europe) would suffer too,” Hense said.

Wide presence for carmakers
The German economy relies heavily on its car manufacturers — its automotive market is the largest in Europe. A slowdown could impact jobs in Germany, but also in the rest of Europe.

French multinational Groupe PSA, that has Opel as a subsidiary, runs 10 plants in six European countries: Germany, the U.K., Spain, Austria, Hungary and Poland. As of December 2018, it employed 30,400 people across Europe, half of which were in Germany.

Volkswagen Group, at the end of 2017, had about 289,000 employees in Germany and about 186,000 in the rest of Europe. Most of its plants are in Germany, followed by Poland, the Czech Republic, Spain, France and Sweden. Germany’s Daimler has a plant in Portugal and another in France, with a total of 917 employees.

Could Italy could be hit the hardest?
The German car industry might not be as linked to Italy as other nations, but Rome’s vulnerable economic position could accentuate any knock-on effects of a German recession.

In terms of other European countries, Italy is particularly sensitive to any type of risk, Christoph Schon, executive director of risk management firm Axioma, told CNBC via email.

The Italian economy grew only 0.1% in the first quarter of the year — having experienced a short-lived technical recession at the end of 2018. However, “the Italian economy is still struggling to find firmer ground,” ING said in a note on Tuesday.

Data from 2018 shows that the majority of tourists in Italy come from Germany. The southern European country is the second most attractive country in the region for German citizens to go on holiday, after Spain, according to German publication Deutsche Welle.

Thus, a lower number of German tourists in Italy could hurt its economy.

Different analysts argue that the ongoing trade war between China and the Unites States as well as the U.K.’s departure from the EU could add further pressure on Berlin and the country’s economy.

“The all-important automobile industry would be disproportionally hit by either of these scenarios, not only because German manufacturers would find it more difficult to sell their cars in the other regions, but also, because the whole production process relies so much on cross-border traffic of parts and components,” Schon, from Axioma, told CNBC via email.

Christopher Peel, chief investment officer at Tavistock Investments, told CNBC Thursday he’s expecting a recession in Germany if the U.K. does leaves the EU without a formal deal.

“My feeling is Boris Johnson wins the Conservative leadership contest, leaves the EU without a deal and that will hurt everyone, in particular Germany,” he said over the phone.

He added that the “anaemic” growth seen in Germany over the last few months, coupled with its dependence on the auto sector, puts Berlin in a difficult position in the event of a hard Brexit.

According to the German Association of the Automotive Industry, the U.K. was the single largest export market for German carmarkers.
Source: CNBC

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