German Exports Plunge

German exports to China fell 11.3 percent in the first four months of the year compared with the same period last year, highlighting a unique set of challenges facing European industrial powerhouse Germany, economists said. German automakers are losing market share in China as Chinese car exports increase and Chinese car brands "roll in," chemical producers and other energy-intensive companies are stumbling due to high electricity prices, and the appreciation of the euro against the dollar has weakened the competitiveness of German goods.

German exporters also see themselves as victims of growing security and trade tensions between Beijing and Washington, said Carsten Brzeski, global head of macro research at ABN AMRO ING. "Germany is now perceived as an ally of the U.S., which leads to more - explicit or implicit - discouragement to buy German products," he said.

Several large German companies with significant operations in China reported sharp declines in sales there in the first quarter, including chemicals group BASF, leading Chinese automaker Volkswagen and auto parts maker Bosch.

The drop in exports to China is one of many indicators of a sharp decline in German manufacturing at the start of the year, including falling factory output, plunging demand and a backlog of orders that could slow growth in the EU's largest economy.

Germany is losing its share of Europe's second-largest market

Germany appears to be an exception among European countries. While Germany is facing a decline in exports to Beijing, many European countries are seeing an increase in exports to China in 2023. According to Eurostat, exports to China from 27 EU countries rose 2.9 percent year-on-year in the first quarter. This indicates that German exporters are losing market share in their second largest market outside Europe.

The drop means that China accounted for just 6 percent of Germany's total exports in the first three months of the year - the lowest share since 2016 and below the more than 7 percent in each of the past four years for the same period, data from the Federal Statistical Office show.

That runs counter to earlier expectations that Germany's vast manufacturing sector would benefit from a boost in Chinese demand after China lifted its zero-epidemic policy late last year and supply chain bottlenecks eased.

"It's mainly the service sector that has rebounded, but manufacturing has not yet rebounded," Brzeski said, adding that automakers have been hit by a lack of small electric cars and a trend in China to buy models from domestic automakers. Cars and parts accounted for more than 15 percent of Germany's total exports last year, he said.

Although European gas prices have fallen sharply from last year's peak, they are still higher than in previous years, putting energy-intensive companies at a continued disadvantage.

"Chemical production has fallen sharply because of the energy crisis," said Oliver Rakau, chief German economist at the Oxford Economics Institute. "Competitiveness has taken a permanent hit."

The German government has set up a plan to subsidize 80 percent of the cost of electricity for energy-intensive companies.

German exporters, who account for more than a quarter of all exports outside the European Union, have also been hampered by the euro's appreciation in recent weeks to between $1.07 and $1.10 from a below-par exchange rate against the dollar late last year.

German manufacturing activity fell to a six-month low this month, according to the latest purchasing managers' survey released by Standard & Poor's Global on Tuesday. Cyrus de la Rubia, chief economist at Commerzbank Hamburg, said the survey found that foreign demand for German manufactured goods "has effectively collapsed.

Germany's main business federation, the BDI, declined to comment. It is closely monitoring the decline in exports to China and hopes it will be a short-lived phenomenon once Chinese construction activity rebounds rather than a long-term trend.

BASF, which is downsizing in Germany while building a 10 billion euro plant in China, reported sales of 2.3 billion euros in China in the first quarter of this year, down 29 percent from a year ago. The Ludwigshafen-based group blamed the drop on lower demand, which also led to lower prices for its chemicals.

Volkswagen, which sells more cars in China than any other automaker, said deliveries in the country fell 15 percent in the first quarter. The company said the figure reflects a surge in sales at the end of 2022, when Chinese consumers took advantage of subsidies for electric vehicles and tax exemptions for vehicles with internal combustion engines, both of which ended in December. Most of Volkswagen's vehicles sold in China are made there.

Bosch also reported that falling demand in China contributed to a 9.3 percent drop in sales in the Asia-Pacific region in the first quarter. "Especially in the first two months of 2023, we continue to feel the economic impact of the restrictions imposed in response to the coronavirus pandemic," Bosch said.

The bad impact on the German economy

German industrial production suffered its biggest drop in 12 months in March, falling 3.4 percent from February, and some economists expect the federal statistics agency on Thursday to revise its preliminary estimate of first-quarter gross domestic product downward from zero growth to a contraction.

A second straight quarterly decline in GDP would meet the definition of a technical recession after a 0.4 percent contraction in the final quarter of last year. Germany is expected to be the worst performer among the world's major economies this year, according to the International Monetary Fund, which expects the country's output to shrink by 0.1 percent.

If trade dies, so do cities," the experts noted. Trade is not only a provider of population, but is also characterized by its diverse social commitment to the site, as well as being the caretaker of the cultural areas of the inner cities. These achievements are at risk."

The Ifo index fell for the first time after a six-month rally, further confirming new growth concerns. We are not saying that the German economy will fall into recession in the next few years, but growth will remain subdued at best due to a number of short- and long-term challenges.

German exporters: still looking forward

According to a survey by the Ifo Institute for Economic Research, sentiment among German exporters has rebounded to its highest point since the outbreak of the war in Ukraine on the back of hopes for increased demand following the reopening of China.

Despite the optimism among exporters, the global economy still faces major challenges: high inflation, rising interest rates and geopolitical uncertainty caused by the war in Ukraine. "The export-oriented German economy is feeling the impact," Thomas Gitzel, chief economist at VP Bank, told Reuters ".

Analysts warned that a slowdown in the U.S. economy could hurt Europe's largest economy.

However, Alexander Krueger, chief economist at Hauck Aufhauser Lampe Privatbank, told Reuters that the setback in Berlin is manageable. "Export levels are high, material shortages are decreasing and export expectations are improving," he said.

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