Surprising shift: German economy stutters, but Lithuanians unconcerned

Already this year, the most powerful economy in Europe, that of Germany, could face recession. This country is one of the main trade partners of and investors in Lithuania. But our country’s industry is calm about this, Simona Viltrakytė-Varkalienė wrote in lrytas.lt

The German GDP in Q2 this year contracted 0.1% compared to Q1.

There are signs that a similar decline will not be avoided in the second half of the year. In such a case, the German economy would essentially be in the recession because its GDP would have been decreasing for two quarters in a row.

However, Lithuanian manufacturers working with Germans are certain that the slowdown will not harm them in any way.

No slowdown spotted

“We are currently growing in Germany. New clients, new products next year and likely this will allow us to obtain fourfold more turnover.

Earlier, we were just a post-Soviet country to Germany that they did not trust. Over the past three years, the situation has fundamentally changed,” Tomas Jaskelevičius, the head of the company Arginta Engineering told Lietuvos Rytas.

This company supplied the German market with machinery to process plastic, car and energy industry machinery, individual products for the manufacturing of trains. Arginta Engineering has been operating in the German market since 2007 and has been improving its performance in the car manufacturing sector.

“Overall, the overall number of clients in Germany is contracting. However, even if we were ten times larger, we would not feel an economic slowdown.

When a client’s turnover is a billion euro and their purchasing power is 400 million euro, if it contracts to 370 million euro, we, who receive an order valued at 2 million euro, do not notice any slowdown,” T. Jaskelevičius spoke.

Could throw billions

German-Baltic Chamber of Commerce Lithuanian office head Audronė Gurinskienė is convinced that German investment in Lithuania will not decrease this year. According to her, the influence of the slowing German economy has definitely not reached us.

“I have not heard any such talks from companies, nor do I have news about plans to terminate contracts. Especially given that Germany has so many instruments, which would aid in resisting recession,” A. Gurinskienė told Lietuvos Rytas.

In recent years, the Germans had a budget surplus, they have accumulated a significant reserve, thus can take measures to spur on their economy. For example, German Minister of Finance Olaf Scholz hinted that 50 billion euro may be set aside for this.

German results

On the other hand, the results of the first two quarters showed that German exports are slowing, particularly in the automotive industry.

Businesses there are also concerned regarding Brexit and the trade wars between the USA and China.

According to the director of the ISM Management and Economics University Economics Programme Tadas Šarapovas, talks have already emerged that Germany may have to reconsider its fiscal policy – ease conditions for businesses in terms of taxation.

“However, the German tax system is rather complex, making changes is no simple feat. Traditionally, they do not make rapid decisions. How soon this should be done in order to avoid recession is hard to say. On the other hand, it is unclear whether it would yield sufficient effect,” T. Šarapovas mused.

According to A. Gurinskienė, economic results overall should be reviewed at the end of the year and it is too early to do so right now.

“In the end, Lithuania comprises such a small fraction of imports to Germany that it is hardly likely to impact us much. Every day we receive inquiries from German businessmen on who could be their suppliers.

During everyday work, I have not noticed that anyone would be relinquishing their plans. If it does happen, it is more likely due to holidays and not the coming recession,” the chief of the German-Baltic Chamber of Commerce Lithuania office said.

Not lacking for work thus far

When asked whether those working in Germany have cause for concern due to changes in the economy, A. Gurinskienė assured that given the vast demand for labour, there could be no talks about reducing wages.

This was confirmed by job search portal cvmarket.lt representative Raimonda Tatarėlytė. She compared this and last year’s first halves – the number of advertisements inviting to work in Germany has risen by twenty percent this year.

The wages offered by employers have changed little, with hourly wages in the agriculture and manufacturing sectors rising an average of 15% (from 8.5 euro to 10 euro), the manufacturing sector has posted 14% monthly wage growth (from 2.2 thousand to 2.5 thousand).

“One of the more notable differences is that there is more of a search for labourers, while the number of job vacancies for specialists has slightly decreased,” R. Tatarėlytė said.

Advises to prepare for a decline

T. Šarapovas believes that currently, it may be possible to see technical signs of recession in Germany, but compared to data from 2018, it is still growing, albeit very slow.

“Nevertheless, for countries such as Lithuania; small, open and oriented toward exports countries, their governments should carefully monitor every signal. If the German economy is giving signs that there could be changes, you must decide, what tactic to employ.

After all, Germany is linked to other states that Lithuania exports to. Thus, if there was a freeze in Germany, it would be felt in other partner countries and this would have consequences for Lithuania. Because with slowed exports, there would be little room to manoeuvre,” T. Šarapovas explained.

With exports contracting, it is likely that wages would follow suit, people would spend less on consumption and companies would invest less. In order for the country to maintain economic stability, there would be only one way forward – to increase state spending.

Lithuanian Industrialists Confederation (LPK) vice president Vidmantas Janulevičius also has urged more activity from the public sector.

“To prepare and save for a potential slowdown is a must. Most companies suspect it and are wondering if they shouldn’t slow down borrowing. Only this was done even without them by the banks not lending to industry.

The government should seek means to bring in capital. Furthermore, the state should already be preparing for borrowing because it can be done much cheaper, loans during hard times come at a great cost and are difficult to obtain,” V. Janulevičius spoke.

Largest burden

The situation in international markets, upon whom the Lithuanian engineering industry depends, is currently fragile and unstable.

Firstly, due to economic slowdowns and trade wars, world trade growth has decreased. Second, signals are emerging that trade wars are increasingly harming real economies.

However, for now, only in very few companies related to the German market can you feel the situation worsening. According to V. Janulevičius‘ information, only 6-7% of companies exporting to Germany have seen reduced orders.

Meanwhile, the metals industry is continuing to gain momentum, the household goods manufacturers are also not slowing their tempo. The only segment where you can see a slowdown is regarding the manufacturing of certain parts that are later used for assembly in Germany.

“LPK members comprise 60-70% of all exporting companies, thus talks about the economic slowdown in a nearby country cannot fail in reaching us.

The further, the more often we talk about it. Nevertheless, for the past few quarters, the Lithuanian industry has been operating at the largest possible, more than 90%, capacity,” the LPK VP stated.

According to data from Lithuanian Engineering Industry Association LINPRA director Darius Lasionis, in H1 this year, Lithuanian origin exports to Germany increased by almost ten percent.

That said, from among the responses of association members, it can be seen that signs are emerging that due to the slowing German economy, results will no longer grow in the future.

However, D. Lasionis also does not expect a major decline.

Useful to shift manufacturing to Lithuania

SME Finance economic advisor Aleksandras Izgorodinas was surprised that the German industry’s slowdown has yet to have a marked impact on the Lithuanian economy. Quite the contrary – Lithuanian export and industry production capacity growth was caused by several important reasons.

The first is the belated Lithuanian export metric reaction to changes in external markets. This is because, for a time, manufacturers continue working based on old contracts, which are not renewed on a monthly basis.

“Second, during the first half, Lithuanian export to Germany growth was supported by especially strong domestic consumption there. Finally, a certain level of decline in German industry benefits Lithuanian exporters because in such cases, it is more useful for the Germans to shift part of their manufacturing to Lithuania and thus cut costs,” he explained.

Representatives from the Lithuanian manufacturing industry and free economic zones have already observed an increased inclination from among German companies to cooperate with Lithuanian businesses.

“Wages in Germany or Denmark are rising nigh on every hour, Lithuania so far remains among attractive countries to develop production. Thus, our industry demonstrates growth,” A. Izgorodinas said.

He believes that the most uncertainty arises regarding exports to Germany. That said, due to record low unemployment levels (just 3.1%), its domestic market will remain particularly strong, which is a positive sign. However, the decline in the German industry itself in June was the largest this year.

“So far, the situation is not critical, but there is a feeling that such trends are starting to linger. The manufacturing industry follows the world economy and its condition is fragile,” the analyst said.