German economic weakness spurs angst in neighbouring countries

By Rene Wagner and Maria Martinez

BERLIN (Reuters) - Germany's economic weakness is causing concern in neighbouring countries from Switzerland to Poland, prompting some foreign economists to call for reforms in the euro zone's largest economy to stop the spread of the malaise.

The International Monetary Fund cut its forecasts for German GDP growth by 0.3% for both 2024 and 2025. It now expects growth of just 0.2% this year, the weakest among its large euro zone peers.

"Without economic stimulus from Germany, Austria will struggle," said Gabriel Felbermayr, director of the Austrian Institute of Economic Research Wifo.

Germany is by far Austria's most important trading partner. Just under 30% of exports go to its much larger neighbour, corresponding to 12% of Austria's gross domestic product, Felbermayr said.

In 2023, bilateral trade volume between Germany and Austria fell by 8%.

"This means that Germany's weakness is having a direct negative impact on the Austrian economy," Felbermayr said. "Mechanical engineering, chemicals, the metal industry and the automotive sector are particularly dependent on the German economy."

The situation is similar in Switzerland, for which Germany is also the main trading partner.

"When Germany suffers a hiccup, Switzerland notices it too," said Martin Mosler, head of financial policy at the Institute for Swiss Economic Policy IWP.

Swiss exports to Germany fell by 1.1% in the first quarter, having already slipped at the end of 2023.

"This affects several sectors - from luxury watches to intermediate products that many highly specialised SMEs (small and medium enterprises), such as those in the electronics industry, supply to Germany," said Moser.

SUPPLY CHAINS

In Poland, the industrial sector was impacted by Germany's recession last year.

Production in energy-intensive industries such as chemicals or metal casting has contracted by around 15% to 20% since Russia's invasion of Ukraine in Feb. 2022, said Paweł Sliwowski, director of the Polish Economic Institute PIE.

"These sectors are closely integrated into the German supply chains," he said.

Meanwhile there has been only a very modest expansion in the activity of consumer goods producers.

"Production of furniture or other household appliances has remained largely unchanged since 2022 due to lower foreign demand," Sliwowski said.

On average, 27% of total Polish exports go to Germany.

"From Poland's point of view, a more appropriate policy for the German government would be to increase public investment," said Sliwowski.

Wifo director Felbermayr made a similar appeal.

"In Germany, investment activity must get going again. This requires effective short-term stimuli," he said, adding that Berlin must also do more to get long-term growth back on track.

"It would probably be particularly effective if it were to advocate an ambitious deepening of the EU single market for financial services, energy and telecoms," said Felbermayr.

(Reporting by Maria Martinez and Rene Wagner; Editing by Gareth Jones)