German recession set to shoot Portugal’s automotive sector in the foot

The Portuguese economy is often highly synchronized with the German economy. Generally speaking, whenever there is a recession in Germany, a scenario that is at the moment increasingly likely, the waves of impact end up being felt in Portugal, sooner or later, because of the large investments Germans have in the national economy, and via exports.

Germany is the third-largest customer of Portuguese goods and services. The German market represents a turnover of almost ten billion euros a year.

According to AICEP data, in the list of the ten largest exporters to Germany are four major factories located in the northern region of Portugal (Bosch, Continental, Gabor and Preh). Six of these ten companies across the country are in the automotive sector or are acting as suppliers of automotive components, including tires.

Last week Eurostat and the German statistics office (Destatis) confirmed what had long been feared. Germany, the Eurozone’s largest economy, is nearing a recession, and effectively stagnant.

Yesterday, the German central bank (Bundesbank) expanded on this matter, claiming that the recession is highly likely to materialize as early as the third quarter of this year.

Jens Weidmann, the Bundesbank chairman, explained that “until now, the weaknesses of the economy have been concentrated in industry and exports.” “International trade disputes and Brexit are important reasons” to explain this new scenario: Germany is facing “a sharp decline” in its exports and entrepreneurs are already shrinking in investment (new machines and equipment), noted the central bank economists.

With all this on the table, the Bundesbank considers that the danger of recession is becoming more real and, accordingly, has cut this year’s growth forecast to 0.3% (in July, the Commission had estimated a better value of 0.5% ).

Angela Merkel’s government has already begun talking about a possible large-scale stimulus plan to prevent the sinking of one of the world’s greatest powers. Quoted by Bloomberg, Germany’s finance minister, Olaf Scholz, recalled that “the latest crisis cost us 50 billion euros, according to my estimates.”

We recall that Germany, whose public accounts are more than balanced (1% surplus budget balance and a debt ratio of only 58% of GDP, below the Stability and Growth Pact limit), is one of the countries of the euro with greater budgetary scope to deal with a crisis. The markets reacted with some satisfaction. Interest rates went up, so did the European stock markets. Even oil appreciated.

Simona Gambarini of Capital Economics pushes forward the issue. The economist believes that there may be some resolution to halt a possible crisis, but nothing like 50 billion euros. “I doubt that there is much appetite among German policy makers to embark on a big budget boost.” Moreover, the analyst recalls, the European Central Bank remains active and eager to continue to help the economy with very low-interest rates, close to zero or even negative, so debt will remain very cheap.

AICEP data compiled from Bank of Portugal data shows that Germany remains the third-largest customer of Portuguese sales (after Spain and France), absorbing 11% of Portuguese exports. It is also a high profile direct investor with a strong presence in advanced technologies, particularly in the automotive cluster.

Furthermore, last year more than 21% of German purchases from Portugal (almost 1400 million euros) were in cars and other transportation vehicles. And the increase was impressive as well, having increased by 18% compared to 2017. It is the second-largest Portuguese market in Germany. Leading the way are the nearly two billion euros sold in machinery and equipment (30% of total exported goods).

What is certain is that whenever Germany gets into financial difficulties, there is a sharp decline in the net balance of German foreign direct investment in Portugal. When the situation clears, we can only hope that this balance will improve.