The negative turn came with the war.
Following the lifting of the closures due to the coronavirus epidemic, we witnessed a significant economic recovery across Europe, however, the year 2022 brought several changes and negative turns, which intensified in 2023 - explained Dóra Erdélyi, listing the factors:
• the Russian-Ukrainian war and the generally tense geopolitical situation,
• energy crisis,
• sanctions,
• weak global (mainly Chinese) demand.
Inflation exceeded the 2 percent target of the European Central Bank (ECB) already in the second half of 2021 and showed a gradual acceleration. It peaked at 10.6 percent in October 2022, and then showed a gradual slowdown, but in December 2023 it was still well above the central bank target, at 2.9 percent in the euro zone.
As a result of the rise in inflation, real wages, i.e. the purchasing power of earnings, have gradually decreased in the eurozone and at the level of the member countries over the past two to two and a half years.
- explained the Oeconomus analyst.
All of this restrained the consumption expenditures of households, as well as economic growth. At the same time, the central bank of the Eurozone tightened monetary conditions in response to high inflation, which also restrained the region's economic performance. Joining this, Dániel Molnár said that the slowdown of the Eurozone economy was caused by the weakening of consumption and investments. Economic uncertainty and the strict interest rate environment played a major role in the decline in investments. The improvement in net exports could only offset this to a small extent.
Germany is still the sick man of Europe
According to Eurostat, the GDP of Ireland, Germany and Lithuania decreased the most on a quarterly basis in the fourth quarter of 2023. Among these three countries, the poor performance of Germany is worth highlighting for several reasons.
On the one hand, Germany is a country with a dominant economic power at the level of the Eurozone, and on the other hand, it is Hungary's most important foreign trade partner
Mihály Tatár told Index. The leading analyst of Oeconomus added that in 2022 Germany accounted for 21 percent of imports and 25 percent of exports within Hungary's foreign trade product turnover.
The poor performance of the German economy continued, earning it the title of "Sick Man of Europe".
- said Tatar, pointing out that the German gross national product was essentially unable to grow in the first three quarters of 2023, and then shrank in the fourth quarter - this is especially remarkable in light of the fact that the population grew by 0.4 percent thanks to migration. By comparison, US GDP expanded by 3.3 percent in the fourth quarter, beating expectations.
The performance of the German economy deteriorated dramatically
Since the inflationary shock, the population has strongly restrained their consumption and prefers to save – the stock of German bank deposits has risen to a record high.
In addition to the war recession and the separation from the Russian markets, the difficulties of exports are aggravated by the slowdown in China and this increasingly strong Chinese competition
- said Mihály Tatár, who says that the budgetary strictness also complicates the recovery: the German constitution prohibits indebtedness, so the Lámpakoalíció cannot "spend" itself out of the recession. The expert pointed out that in a survey by the European Commission, German businesses drew attention to several difficulties affecting them:
the decline in demand and the shortage of (skilled) labor in 2023,
a significant limiting factor was the drastic increase in energy prices in 2022.
Furthermore, the weight of German industry within the GDP has decreased, from 25.2 percent in 2005 to 23.5 percent by 2022, according to Eurostat data, partly due to the forced green transition and partly due to energy market uncertainty: the performance of energy-intensive industries by 20 percent shrunk from pre-war levels.
The short-term outlook for German industry remains gloomy
- Tatár believes, which is partly supported by the fact that the purchasing manager index of the manufacturing industry has been moving below the 50-point limit indicating a decline since August 2022. All of this shows the pessimism of German industrial companies, which is exacerbated by the uncertain economic environment and geopolitical tension.
Hungary cannot be happy about Germany's weakness
The largest receiving market for Hungarian exports is the European Union, primarily Germany. Because of this, the weakening of our foreign markets and the drop in demand also affect the domestic economy through the sectors that produce for export.
The weakening of the Eurozone is unfavorable for Hungary
Molnár believes. Tatar pointed out that Hungary is a small, but largely open economy in terms of foreign trade, and is highly dependent on foreign market conditions and the development of demand on the markets of foreign trade partners.
Within our foreign trade product turnover, nearly 70 percent of our imports and 77 percent of our exports are linked to the member countries of the European Union. Thus, the economic slowdown or stagnation of the European Union, and within it the Eurozone, has a negative effect on the Hungarian economy as well - through foreign trade
explained the expert. In its December Inflation Report, the MNB also dealt with Hungary's foreign markets and the possible directions of exports. According to the central bank, the subdued economic performance of our most important foreign trade partners may persist this year as well, the moderate European economy will restrain Hungarian exports. At the same time
"ongoing and newly announced significant capacity-expanding foreign direct capital investments offset this effect".
Featured Image: German Chancellor Olaf Scholz addresses a session of the Bundestag, the federal parliament, in Berlin on November 28, 2023. In his speech, Scholz admitted that the decision of the Constitutional Court, which annulled the redeployment of 60 billion euros in the budget to measures against climate change and the modernization of the country instead of mitigating the consequences of the coronavirus epidemic, makes governance difficult, but regardless, the government maintains its previous goals. MTI/EPA/Clemens Bilan
