Growth in Germany and the Netherlands is expected to slow further in 2019 as a reliance on exports makes them more vulnerable to the negative effects of U.S. trade policy, China's slowdown and Brexit.
Export-oriented eurozone economies will be hit hardest in 2019 as trade growth in the region has plummeted to zero, dragged down by weaker export demand, particularly from China, the Organization for Economic Co-Operation and Development said in its March 6 report. Eurozone exports to China were zero at the end of 2018, compared to a growth rate of 13% in 2017, the OECD said.
The OECD, the European Commission, and national authorities have all slashed growth forecasts for the both the German and Dutch economies.
Growth forecasts for "highly open and export-dependent Aaa-rated" countries have been revised since the beginning of the year given the general slowdown in global economic growth and trade, Moody's said in a March 11 note, commenting on a recent downgrade for the Netherlands.
Slowing demand from China could cripple the eurozone's largest economy, Germany, which traditionally is powered by exports. The Chinese slowdown and potential U.S. import tariffs on European cars are among the top risks to the German economy in 2019, according to the OECD.
After cutting in January the growth outlook to 1.0% from 1.8%, the German government now expects even weaker growth at 0.8%, Handelsblatt reported March 11, citing a finance ministry memo. Escalation of global trade conflicts; stalling growth in the U.S., China, and emerging economies; political risks in Europe such as a disorderly Brexit; and the drop in automotive production are among the key threats to German growth listed in the memo. Based on current data, the OECD's outlook for Germany seems plausible but the figures suggest the economy may slow even further, according to the memo.
The OECD on March 6 downgraded its 2019 GDP growth outlook for Germany to 0.7% from 1.6% previously. "Trade-related uncertainties and moderating world demand" will affect German exports in 2019 that already slowed in 2018 due to the global trade tensions, the OECD said.
Potential implementation of the proposed U.S. import tariffs on European cars will mostly affect Germany, with the country's auto industry also coming under more pressure from new vehicle emission tests. German car manufacturers continue to face a backlash over emissions-cheating software that was first discovered in 2014.
Germany's industrial production dropped unexpectedly in January and its foreign-trade surplus also declined on the previous month, according to preliminary data released by the German Statistics Office on March 11.
Dutch GDP at 5-year low
The Dutch Central Planning Bureau cut the country's 2019 GDP growth outlook to 1.5% from the prior forecast of 2.2% on March 5, warning of a considerable slowdown in Dutch exports over the next two years. Uncertainties around the U.S. trade policy, the U.K.'s departure from the EU, and the state of the Chinese economy will be key factors affecting the Netherlands in 2019 and 2020, the CPB said. The projected growth is the lowest since 2014.
In February, the European Commission also downgraded its outlook for the Dutch economy in 2019, to 1.7% from 2.4%.
The lower growth forecasts reflect the Dutch economy's high exposure to geopolitics and global trade, according to Moody's. Given that the U.K. is the Netherlands' third-largest trade partner, one of the top risks to Dutch growth is a no-deal Brexit, in which the U.K. will crash out of the EU without any arrangements, Moody's said. A second big risk to the Dutch economy is a sharper-than-expected slowdown in the eurozone, the rating agency said.
A further slowdown in Germany and a deeper recession in Italy are among the main risks to eurozone growth, according to the OECD. The organization slashed its growth forecast for the eurozone economy to 1.0% from 1.8% previously, in its latest update March 6.
Foreign trade challenges for banks
The U.S. foreign trade policy poses a serious threat to German exports and export finance, the Association of German Banks, BdB, warned in a March 11 report. The threat of new U.S.-imposed import tariffs is seen as an attack on global free trade, said the association, which represents all privately held commercial banks in Germany.
The escalating trade conflict between the U.S. and China is already affecting global supply chains. The disruption of cross-border production processes makes them more expensive and inefficient, which could render some production sites and investments uneconomical in the future, the BdB warned. If the conflict escalates, it could lead to a collapse in global trade that would have severe consequences for German companies and banks financing foreign trade, the association said.
The biggest and most immediate risk to German companies and their financiers comes from U.S. sanctions against countries such as Iran and Russia. Unlike in the past, the U.S. sanctions against those countries widely diverge from the sanctions imposed by the EU. Uncertainty among German companies and banks is growing as they are worried about being punished by the U.S. because of dealings with sanctioned countries. The threat of potential new sanctions has negative implications for large international projects that usually are completed and financed over the long term, the BdB said. The situation is exacerbated by the fact that U.S. sanctions generally do not provide protection for existing projects.