The ailing state of the German economy is a major new challenge for export-dependent Central European countries, which have yet to recover from some of the world’s worst periods of inflation, Reuters reported on Tuesday, as quoted by Agerpres.

Close trade ties with Germany and its once-powerful automotive sector have been an asset to the region in the years since the fall of communism. But now these ties risk becoming a burden for the economies of Hungary, the Czech Republic and Slovakia.

Already, some local companies that have relied on ties to Germany are pushing deeper into more distant markets and expanding into sectors such as defense to cushion the weakness of their big neighbor to the west, which faces another year of recession.

But their moves come at a time of great geopolitical uncertainty – the war in Ukraine, conflict in the Middle East and rising protectionism – and despite the boost from the defense sector, all these factors could undermine such efforts by companies in the region.

“Economic disruptions affecting the region’s most important trading partner and continued weakness in the automotive sector create additional risks for the CEE region,” said Don Holland, director of economic research at Moody’s Analytics.

The countries of Central Europe massively export to Germany

Rising inflation in central Europe – reaching a staggering 25% in Hungary last year – has prompted central banks to raise borrowing costs to their highest level in two decades.

The Czechs have experienced the longest decline in real wages, which has been going on for eight quarters in a row. According to the Bundesbank, in 2021 the annual turnover of German companies in Central Europe was about 250 billion euros ($270 billion), they employed about 1 million people directly and many more through suppliers.

According to S&P Global, the Czech Republic and Hungary rely on Germany for a third and a quarter of their exports, respectively, while Slovakia sends a fifth of its exports there.

Poland is seen as less vulnerable due to the strength of its more diversified domestic economy, and its exports are less dependent on car production. The best-case scenario for most companies polled by Reuters would be stagnant sales this year, although some are not ruling out a general decline in revenues and possible job cuts.

Hungarian company DGA Gepgyarto es Automatizalasi Kft, which manufactures steel structures and custom equipment, planned to increase capacity by 50% based on customer feedback to meet expected growth in demand over three years, from 2023 to 2025.

“This increase in demand has disappeared,” Tamas Tornai, chief executive of the holding company that oversees DGA, told Reuters. However, the DGA continues to invest 2.5 billion forints (US$6.95 million) to serve the growing defense industry.

The German automotive sector is facing more and more pronounced difficulties

In Germany, the automotive sector faces not only weak sales in the US and European markets, but also obstacles, from high energy prices to the global transition to electric mobility, which requires a rethinking of the future of internal combustion engines.

In Central Europe, Hungary took the initiative to attract investments in the production of batteries and electric vehicles from China, positioning itself as a meeting place for Eastern and Western investors.

“There is a very significant drop in demand in the automotive sector caused by inflation, interest rates and economic uncertainty, and private buyers have almost disappeared from the market,” said Tamas Mogiorosi, director of development at Alap Group, which provides service quality management services. and others for the automotive, aerospace and electronics sectors and which tried to offset the decline in Western European markets by increasing orders from Asian customers.

Otto Danek, vice-president of the Czech Exporters Association, for his part noted that the sector has seen a clear slowdown since the second half of 2023 due to weakness in Germany.

“The relatively small drop in demand in this region has a significant impact on the entire export segment,” said Danek, who owns Atas Elektromotory Nachod, which makes small electric motors. “We are looking for new markets, especially in Europe, but such a deficit cannot be filled in six months,” said the Czech businessman.

Ratings agencies warned that the downgrade could hamper efforts to reduce the budget deficit, which S&P Global said would remain “exceptionally large” in historical terms for the region this year.

“Persistent German weakness is one of the main risks we see for Central and Eastern Europe, potentially undermining medium-term growth and fiscal consolidation plans, which are already in trouble,” concluded Karen Vartapetov, director and chief analyst for East-Central-European. and CIS in S&P Global.