Silence of machine tools: why the collapse of German industry could threaten the eurozone economy

Since the beginning of 2020, the euro has shown significant weakening in the global foreign exchange market. Over the past six weeks, the exchange rate of the single European currency against the US dollar has dipped by 2.7% and reached the lowest level since October 2019 at the auction on February 11 - $ 1.09 per euro.

As an analyst with Finam Group of Companies Alexei Korenev told RT, the recent depreciation of the euro was initially caused by the global strengthening of the dollar. Meanwhile, in February, the mood of European investors noticeably worsened. According to the expert, market participants were alerted by negative statistics on the German economy.

According to the Federal Statistical Office of Germany, in December 2019, the country's industrial production collapsed immediately by 3.5%. The fall was the largest since spring 2009.

Moreover, the general index of German production updated a six-year low and dropped to 97.8 points. The last time a similar level could be observed in the summer of 2014.

In many respects, the record drop in German industry is associated with a slowdown in the global economy and a slowdown in China’s GDP growth, one of Germany’s largest trading partners. This was in an interview with RT, the head of the analytical department of AMarkets Artyom Deev.

“In 2018, the volume of exports from Germany to China amounted to € 93.1 billion, but already at the beginning of 2019 the figure fell by 1.3%, and by August fell 5.1%. As the Asian Republic began to import goods from Germany less, the industrial production of Europe’s largest economy began to decline, ”said Deev.

Moreover, a negative factor for German manufacturers was the British exit from the European Union. As Artyom Deyev explained, for many years the United Kingdom has remained one of the priority markets for the German automotive industry. However, the possible imposition by London of trade restrictions after Brexit may threaten German exporters.

According to the analyst, an additional blow to German industry was the US trade war. Recall that from June 2018, the United States began to levy duties on imported European steel and aluminum goods. At the same time, Donald Trump has repeatedly threatened to introduce higher tariffs on car imports from Europe.

Low revs

According to the Avtostat analytical agency, in 2019 the German car market grew by 5% - up to 3.3 million cars. At the same time, as experts at IHS Markit calculated, already in January 2020, car sales began to decline sharply, and by the end of the year, the market risks falling to 3.19 million cars.

Yuri Kvashnin, director of the Center for European Studies at IMEMO RAS, told RT that possible problems in the German automotive industry risk turning into an even more significant drop in the country's industry.

“At the end of 2019, economic growth throughout the European Union amounted to about 1%. In fact, we are witnessing stagnation, as a result of which there is a drop in demand for German products in Italy, Spain, France, and also in the countries of Central and Eastern Europe, ”Kvashin added.

In addition to a slowdown in the European economy, the overall decline in the global car market will have a negative impact on the automotive industry in Germany. According to the consulting company LMC Automotive, in 2019, sales of passenger cars in the world fell by 4.4%. At the same time, analysts at the international rating agency Fitch predict a worsening dynamics in the near future.

“We see no particular reason to expect the global car market to recover in 2020. As a result, the automotive industry will continue to negatively affect global production and the economies of countries with a high share of this sector in GDP, such as Germany, ”says Brian Coulton, chief economist at Fitch.

Domino effect

According to Yuri Kvashin, in 2019 the German economy was on the verge of a recession and grew only by 0.6%. According to the expert, the fall in GDP did not occur due to the growth of the services sector. So, at the moment, such sectors as transport, the information technology sector and financial services continue to show stable dynamics.

“The development of the service sector helps offset the decline in industrial production. Nevertheless, according to our forecasts, in 2020 the growth rate of the German economy will remain weak, ”Kvashnin added.

However, further deterioration of the situation in the industrial sector may result in a decrease in German business revenues and the country's budget. According to Artyom Deev, as a result, it will be increasingly difficult for Berlin to provide financial assistance to Italy, Greece, Portugal and other EU countries.

According to Alexei Korenev, a simultaneous decline in consumer demand risks leading to the start of a full-blown recession in Germany. In this case, over time, the economic downturn may spread to other EU countries.

“The problems of Germany, the most powerful EU economy, will undoubtedly affect the rest of Europe. First of all, the countries in the south of the region will suffer, as it was already in 2008-2009 - Italy, Greece, Spain. Further, the recession may spread to the whole of Europe, ”the expert concluded.