Germany, Latvia's third-largest export market, has recorded the highest number of corporate insolvencies in the past eight years, raising concerns about the potential impact of further developments in Germany's economic situation on the business environment in Latvia and the other Baltic states, warn economists at the global risk management company “Coface”. The value of Latvia's exports to Germany last year was 1.26 billion euros, and 609.6 million euros in the first half of this year. Economists forecast that the negative trend in the number of insolvencies in Germany could stabilise somewhat towards the end of this year, but overall the forecast for Germany's gross domestic product (GDP) growth in 2024 has been set at just 0.3%. For Latvia, meanwhile, “Coface” economists forecast overall GDP growth of 1.7% in 2024, and in 2025 it could even reach 2.1%.
According to data from Germany's statistics office, the highest number of insolvencies in Germany was recorded in May this year – 1,934 cases in a single month, the highest figure since 2016. At the same time, overall corporate insolvency trends in the first half of this year have been negative when the situation over the past eight years is analysed. The largest increase in the number of insolvencies in the first five months of 2024 was recorded in the automotive manufacturing sector. Economists also highlight as a worrying indicator the upward trend in the volume of liabilities held by companies facing bankruptcy, which in the first months of this year has particularly affected the real estate, trade, and finance and insurance sectors.
Germany is one of the largest trading partners of Latvia's exporting companies, and a range of different industries in the Baltics are connected to the German manufacturing sector. In Latvia's case, the bulk of exports to Germany in recent years has consisted of wood and wood products, vehicles, machinery, mechanical appliances and electrical equipment, animal and livestock products, as well as food industry products, plant products and chemical industry products.
“Trade links between the Baltics and Germany are intensive in both exports and imports, and this cooperation is important to both sides in securing manufacturing supply chains. It can therefore be seen that the current challenges and reduced economic activity in German industry are already having a negative effect on companies in the Baltic states. Our forecasts indicate that the German economy should begin to improve in the final quarter of this year. The first positive signals of this are a rise in household consumption, driven by steady wage growth trends. At the same time, this is only partly good news for companies in the Baltic states, which are nevertheless more dependent on sectors that remain in a difficult situation,” explains “Coface” chief economist for the Central and Eastern Europe (CEE) region Gžegožs Sīlevičs (Grzegorz Sielewicz).
“Coface” economists forecast that gross domestic product in Latvia will grow by 1.7% in 2024 and in Lithuania by 2.0%, while in Estonia it will contract by -0.5% this year. At the same time, both Estonia and Lithuania are forecast to see rapid economic growth next year, with GDP growth projected at as much as 2.5%. For Latvia, meanwhile, “Coface” economists forecast GDP growth of 2.1% in 2025.
The economic situation in Latvia has so far been negatively affected, as “Coface” notes, by the fall in external demand and investment. However, the volume of investment in Latvia is expected to rise again thanks to the take-up of European Union funds. Labour market trends also promise positive signs for the Latvian economy and could support growth in average pay. For Latvian exports, however, economists promise only a gradual recovery, determined by the modest activity of the manufacturing sector in partner trading countries, not only in Germany but elsewhere in the European Union.
Economists' forecasts regarding a recovery in Germany's business sector are cautious, and the long-term outlook for many companies is unclear. After the end of the pandemic, some companies in Germany invested in development in the hope of a rapid economic recovery, taking on greater debt obligations and reducing their reserves. Instead, the economic situation over the past two years has been rather challenging, leaving these companies' financial position strained. An additional burden for some companies is the unplanned obligation to repay state support granted during the pandemic: although the support payments were initially declared as state aid, the eligibility criteria for the payments were subsequently tightened, making some companies partly or wholly ineligible for them.
At the same time, although the European Central Bank has begun a gradual cycle of monetary easing, German banks' lending conditions for companies are still becoming stricter. For example, the average interest rate on new corporate loans has stabilised at around 5.3% (below the peak of October 2023), while the average interest rate on outstanding corporate loans naturally continued to rise (3.5% from April to June 2024 – the highest level since September 2012). These strained financial conditions, together with the slow recovery of the German economy, could potentially lead to an elevated number of insolvencies over a longer period, economists warn.