The decline of Croatian industrial output is expected to accelerate in the second half of 2023 on account of the weakness of the German economy, and this year industrial producers in Croatia might see their exports shrink by as much as 10%, the Croatian Employers Association (HUP) says.

As expected, the German GDP fell by 0.1% on a quarterly basis in the third quarter of 2023 and the private consumption of German households also decreased at a similar rate, Hrvoje Stojić, chief economist at the HUP, says in the latest issue of the HUP’s publication Fokus Tjedna (Focus of the Week).

He estimates that due to a sharp deterioration in financing conditions, the German economy will further decline in the fourth quarter of this year.

“This is not at all surprising considering that in the last 50 years every interest rate growth cycle in Germany has regularly led to a recession,” Stojić says in the section of the publication analysing the impact of the fall in Germany’s GDP on Croatian goods exports.

Despite the recent stabilisation of factory orders, their deterioration in the past year will have a negative effect on industrial production after German companies have mostly fulfilled the orders accumulated during the pandemic crisis, Stojić says.

The manufacturing industry is increasingly stumbling under the weight of weak global demand and affected competitiveness due to more expensive contracts for key energy sources and the appreciation of the euro to the detriment of companies’ competitiveness. The recent collapse in new orders also suggests a sharp decline in construction activity, he adds.

Stojić notes that although inflation is slowing down and wages are picking up, consumer sentiment has worsened significantly, so no recovery of private consumption is expected.

“Therefore, in 2023 we expect a weak growth of the euro area economy of around 0.3%, with a drop in the German GDP of around 0.5%,” the HUP’s chief economist assesses.

Assuming that the recession will last until next spring, the reduced statistical transmission indicates a further decline in the German economy at a rate of 0.3% and stagnation in the euro area, with a GDP growth of 0.1%t in 2024, he adds.

Noting that the European Central Bank will not rush to improve financing conditions until it brings down core inflation, Stojić says that German companies are increasingly worried about the government’s uncertain economic and climate policies, which should be seen in the context of a strong deterioration in Germany’s attractiveness as an investment destination in the last ten years or so.

The quality of doing business in Germany has been deteriorating for years due to the outdated road network, long procedures for issuing business permits, educational standards and high taxes, Stojić concludes.