Coronavirus may jeopardize German economy because of its reliance on China

Since the coronavirus outbreak started, the Chinese economy has begun to suffer. As a result, Germany, and particularly its car industry, could also lose out as China is its most important trading partner.

The outbreak of the coronavirus in China could weaken German growth, according to the most recent calculations published by the German Institute of Economic Research (IFO).

This is not only due to weakened Chinese demand but also because German companies rely on Chinese workers and suppliers. If the Chinese economy were to shrink by 1%, German growth would fall by 0.06%. The researchers based the calculation on the SARS outbreak in 2002 and 2003. However, things could also get worse.

According to information published on the German Foreign Office’s website, economic relations between the two countries are now more intensive than ever before.

At the global level, China is Germany’s largest trading partner, and Germany is China’s most important trading partner within Europe. In 2018, the bilateral trade volume amounted to about €200 billion, which is one-third of the total European trade volume with the Middle Kingdom.

But such close economic relations always entail the risk of mutual dependence. To paraphrase Austrian diplomat Metternich, one could say that ‘when China sneezes, Germany catches a cold’. And at the moment, more than 28,000 Chinese who have contracted the coronavirus are ‘sneezing’.

Factories at a standstill

First and foremost, this is detrimental to the Chinese economy. On 3 February, the Shanghai stock exchange closed with an 8% drop – with the manufacturing, materials management and consumer goods industry being hit particularly hard. The tourism industry also collapsed, as many airlines no longer fly to China.

The city of Wuhan, home to 11 million people and the centre of the outbreak, is an important industrial location. Many factories there are now closed, as are cinemas and other businesses. Since the city was quarantined, import and export of goods and people is severely restricted, which means Wuhan is cut off from supply chains.

According to the US news channel CNN, at least ten other Chinese cities are said to be under travel restrictions. This endangers the economy, as these multi-million ‘mega’ cities are important economic engines.

The Chinese central bank has already taken countermeasures by cutting interest rates to boost the economy with ‘cheap money’.

However, Robert Halver, head of capital market analysis at Baader Bank AG, does not consider this to be effective. “You cannot drown the coronavirus in liquidity,” he told the Die Welt’s television channel. In other words: If production facilities are at a standstill, cheap loans will not help. A standstill remains standstill.

German car industry particularly affected

For Germany, this means that it can export less to China.

Falling consumption in China leads to lower demand for imported products. If the quarantine spreads and an increasing number of Chinese workers have to stay at home, German companies that have branches in China or are dependent on Chinese suppliers will be in trouble.

Germany’s automotive industry, in particular, will be affected. About one-third of all German vehicles (about 5.2 million units) were sold in China in 2019, calculated Centre for Automotive Research, known as CAR.

Besides, many German carmakers have their production facilities in China. In 2019, around 30 factories operated German car manufacturers, writes the German Association of the Automotive Industry (VDA).

In addition, German suppliers of automotive parts have 315 locations in China and that supply chain is also coming under threat. Even across industries, German companies are dependent on Chinese supplies, as industrial goods from China account for 9.4% of the imports of intermediate goods.

Calculations may be too optimistic

From all this, and based on the SARS outbreak in China in 2002 and 2003, the IFO calculates the following correlation: if Chinese growth were to fall by one percentage point because of the coronavirus, the German economy would grow 0.06% more slowly.

However, the IFO Institute warns that the coronavirus could cause more economic damage than the SARS, given that the infection rate appears to be higher.

While 8,809 people fell ill with SARS and 774 died within eight months, 28,365 people have already contracted the coronavirus, and 566 people have died – within just a few weeks.

Related posts

Leave a Comment