Berlin, Beijing The end of China’s strict zero-coronavirus policy in December 2022 was celebrated not only by locals. German export companies are also hoping for better business. China has emerged as a beacon of hope for Germany’s key export economy, which has been strained for three years due to the coronavirus pandemic and the war in Ukraine.
But so far no results. Instead, trade with China continues to collapse in the first months of 2023. According to the Federal Statistical Office, German exports to the People’s Republic of China amounted to 32.5 billion euros in the January-April period, down 10 percent from the same period last year. It is also down 5.4% compared to the last four months of 2022.
The weak development added to concerns that the German economy will not make any headway in the coming months. “Exports to China have been very weak in recent months and export development has generally slowed down significantly,” said Klaus Jurgen, head of global economic forecasting at the Kiel Institute for the World Economy (IfW).
The German economy has slipped into a technical recession during the winter months. Economic output shrank for two straight quarters. This was mainly triggered by weak demand from private households due to high inflation.
The industry has partly offset this, avoiding a deeper recession. As inflation continues to fall, it has recently begun to show a small increase again.
Result: Germany faces threat of economic contraction in 2023
But now this possibility is getting less and less, also because of China. Insufficient demand from the People’s Republic of China also threatens to drag manufacturing into a downward spiral. One indicator is industrial new orders, which is an important leading indicator. Orders from outside the euro zone – mainly affecting China and the US – fell 1.1% in May.
>> Read here: Why Germany Is In Recession – Four Reasons Why
Most economic researchers have recently forecast modest growth for Germany as a whole in 2023. For example, IfW rose 0.5%. Given recent developments, including the export economy, this is difficult to establish. Economists like to say that downward revisions are expected. The OECD, an organization of industrialized countries, released new forecasts on Wednesday: Germany’s economy is expected to come to a standstill in 2023.
Hope: New export data shows improvement
But that hasn’t been finalized yet. It is hoped that exports to China will still drive growth. On Wednesday, Chinese customs authorities released data on imports from Germany in May. In dollar terms, imports rose nearly 7% from the previous month.
Exports to China had already recovered 10.1 percent in April from the previous month, according to the Federal Statistical Office. Due to different calculation methods, the information provided by Wiesbaden statisticians cannot be directly compared with Chinese officials. However, both developments point to a growing likelihood of an improving economic situation for German exports.
Geraldine Dany-Knedlik, head of economic activity at the German Institute for Economic Research (DIW), said: “The latest foreign trade figures from Germany show that the catch-up effect started to emerge from the second quarter.” Many exports that failed due to the zero-coronavirus policy can now be compensated .
Even if that happens, it remains to be seen whether a delayed recovery will actually protect the German economy as a whole from negative growth in 2023.
Reasons: internal and external weaknesses
Weak export demand from German business partners will not disappear overnight as the economic situation in China remains shaky. Some reasons for the weakness remain:
the first: China is only slowly recovering from the coronavirus pandemic. High numbers of infections initially weighed on economic activity following the end of the zero-coronavirus policy. That’s largely over, but China’s economy continues to be weaker than expected.
>> Read here: China’s exports plummet in May
second: The country’s ongoing real estate crisis. The industry has been a major growth engine for the past two decades, but despite government stabilization measures, growth momentum may not be seen in the foreseeable future. “Property developers are heavily indebted and investment is held back as a result,” said DIW economist Pia Hüttl.
third: Perhaps the hopes of German exporters are exaggerated. According to IfW researcher Gern, the end of China’s zero-Covid policy is not an economic stimulus that will have the same effect in all areas.
“During the corona crisis, more goods have been ordered globally – from electronics to healthcare materials – while the consumption of contact-intensive services has been especially restricted,” he explains. Services are therefore increasing – German industry Products are reduced.
Trend: China is alienating German exports
fourth: The lackluster demand for German exports is also a result of the Chinese government’s strategy. Beijing is increasingly encouraging companies operating in China to source from local suppliers.
So even if German exports to China resume in the coming months, the trade relationship could cool down in the long term. Alicia Garcia Herrero, chief Asia-Pacific economist at French investment bank Natixis, said: “Germany’s exports to China are increasingly easily replaced by Chinese production.”
An example is auto parts. “What’s happening now is what we should have expected given the industrial policies that China is pursuing,” said Garcia Herrero. Back in 2015, China adopted the “Made in China 2025” strategy. As a result, key sectors will receive billions of dollars in government funding to make them more independent from other countries.
Garcia Herrero sees the automotive industry as just the beginning: “China will implement its own production in more industries.”
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