German woes darken central Europe's recovery prospects

BUDAPEST/PRAGUE, Jan 30 (Reuters) - The sickly state of the German economy is the next big challenge for the export-reliant countries of central Europe, which are still recovering from some of the world's worst inflation spikes in the wake of the COVID-19 pandemic.

Close trade ties with Germany and its once-mighty auto sector were for years a boon for the region since the collapse of communism. But now those ties risk becoming a drag on the economies of Hungary, Czech Republic and Slovakia.

Already, some local companies reliant on ties with Germany are trying to tap deeper into other overseas markets and branch into industries like defence to mitigate the weakness of their large western neighbour, where another year of near-recession looms.

However such efforts come at a time of major geo-political uncertainties, with the Ukraine war, Middle East conflict and rising protectionism. Despite the push into the defence sector, all of these factors could hamper the efforts of the region's companies.

"Economic disruption in the region's most important trade partner, and persistent weakness in the auto sector, pose additional risks of economic setback to the CEE region," said Dawn Holland, Director, Economic Research at Moody's Analytics.

Central Europe's inflation surge, led by eye-watering levels at 25% in Hungary last year, has prompted central banks to lift borrowing costs to their highest in two decades, with Czechs enduring the most sustained fall in real wages, now spanning eight successive quarters.

German companies had annual turnover of some 250 billion euros ($270 billion) in central Europe in 2021, employing about 1 million people directly and many more through suppliers, according to Germany's Bundesbank.

The Czech Rep...
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