German recession flashes red card to Indian exports

Germany, Europe’s largest economy, has slipped into a recession, sending shockwaves across the continent and beyond, including India.

Gross domestic product (GDP) growth in the world’s fourth-largest economy declined by 0.3% in the first quarter of the calendar year, following a 0.5% fall in the fourth quarter of 2022.

The slowdown in Germany will have a cascading effect on Indian exports that primarily include apparel, medicine, machinery, chemicals, footwear, and leather goods, analysts said.

“The recession will adversely impact India’s annual exports, which include smartphones, apparel, footwear, and leather goods. Germany’s carbon border adjustment mechanism may also hit exports of iron and steel,” Ajay Srivastava, founder of think tank Global Trade Research Initiative (GTRI), told Press Insider.

Under the carbon border adjustment mechanism, producers of commodities including aluminum, fertilizers, cement, and iron and steel from outside the EU will have to shell out a tax based on the quantity of CO2 emitted in their manufacture with effect from January 2026.

Srivastava further stated that India needs to monitor the outcome of the India-EU free trade agreement (FTA) negotiations that are scheduled for 12-16 June.

Indian exports to Germany were valued at $10.44 billion in 2022, according to the United Nations Comtrade database on international trade. These exports may be affected as Germany grapples with its recession, leading to a potential reduction in demand for imported goods.

“This recession will definitely impact the Indian economy as the share of Germany in India’s merchandise exports is huge and growing. It will affect India’s growth potential as well in the long run if it spreads to other European nations. The situation warrants that India tread cautiously in the near term.” Shakeel Qalandar, an economist and a former president of the Chamber of Industries in Kashmir, told Press Insider.

German economy minister Robert Habeck attributed his country’s current economic crisis to its heavy dependence on Russian gas. With Russia being one of the major suppliers of natural gas to Germany, any political or economic instability, or changes in energy policies in Russia, can directly impact the energy supply in Germany.

This dependency on Russia has become particularly challenging amid increasing geopolitical tensions and economic sanctions, leading to supply disruptions and rising energy prices, ultimately affecting the overall German economy.

“We’re fighting our way out of this crisis,” Habeck said in Berlin last week.

Soaring inflation and the ongoing energy crisis have stifled consumption growth, dealing a severe blow to the Germans. 

The Federal Statistical Office of Germany reported last week that “the persistence of high price increases continued to burden the German economy at the start of the year.”

“This was particularly reflected in household final consumption expenditure, which was down 1.2% in the first quarter of 2023,” it said.

Germany has struggled to sustainably meet the energy needs of its industrial sector, which operates at peak efficiency when supplied with Russian fuel.

Berlin has sought to cap the price of power for some energy-intensive companies in its bid to address the energy crisis.

But that also has the potential to further worsen the inflation pressure.

Fuel price subsidies in some sectors may end up costing taxpayers up to $32 billion over the next seven years.

Although the nation’s shift to greener energy generation has been sluggish, Germany has shut its nuclear power reactors and aims to close its coal-fired power facilities by 2030.

Despite the administration’s plans, which include the installation of 1,900 wind turbines and 625 million solar panels by 2030, it is unable to meet the country’s growing demand.

Queries emailed to the German embassy in New Delhi remained unanswered.