Is the malady of the German economy contagious for the Netherlands?

Published on: 29 June 2023

Current issues related to economy, (responsible) investment, pension and income: every week an APG expert gives a clear answer to the question of the week. This time: chief economist Thijs Knaap on the question of to what extent the Netherlands will feel the effects of Germany's economic problems. "To get a picture of the business cycle, the question used to be: 'How is the Ruhr region doing?' Now it should actually read, 'How are things on Wall Street?'"

In the land of the Wirtschaftswunder, business confidence is waning and big companies are threatening to move production abroad. Is the adage once again true that when Germany sneezes, the Netherlands catches a cold?


“Currently, the whole world is suffering from the same economic shocks, to one degree or another,” Knaap explains. “These include weak growth in China, high interest rates here and in the U.S. and the strong euro exchange rate. Then there are some more local shocks, which both Germany and the Netherlands have to deal with, such as high energy prices, rising wages and the transition toward a more sustainable economy. Even if there were no relationship at all between the Dutch and German economies, we are still facing the same shocks here under similar circumstances.”

These intense movements particularly affect industry. “However, the share of industry in the Dutch and German is declining. Partly because many production centers have moved to Asia, and partly because we are spending less and less on stuff and more on services.” This is good news, because it means that when industry goes bad, the entire economy is not immediately at a standstill, Knaap continues. “In the early 1990s, just after German reunification, industry still had a significant share of the economy there. That then dropped to about 21 percent. In the Netherlands, always more focused on trade than industry, it was about 19 percent in the mid-1990s and it’s 13 percent now."

Manufacturing is one of the most volatile sectors of the economy. Consequently, economists used to consider it the most important factor in the business cycle, or short-term fluctuations in economic growth. “But with the declining role of manufacturing, that rule of thumb applies less and less. However, with a 21 percent share, industry is still an economic factor of importance in Germany.”

More diverse

That brings Knaap to the well-known saying that when Germany sneezes, the Netherlands catches a cold. “Many products come off the ship in Rotterdam and are transported directly to Germany. Some are processed here; then the Netherlands provides additional added value. That’s where our economy depends on Germany’s. Of our added value in exports to Germany, about half is for German industry. That percentage is fairly constant. But Germany is a relatively smaller and smaller trading partner: percentage-wise, we export less and less to our big neighbor. The destination of our exports is becoming more diverse; for example, we are exporting more and more to China. So the importance of our other trading partners is increasing, partly at the expense of Germany.” 

Currently, the Dutch economy benefits little from export diversification. “The Chinese economy is not picking up as quickly as expected. We didn’t care that much before, but now it’s bad for exports. We may be less dependent on Germany, but more dependent on other countries like China. So I think the consequences for Dutch industry will not be mild, with the stagnant economy in Germany, slow growth in China, more expensive energy, rising wages and increasing sustainability requirements.”

Wall Street

That leaves the question of what has replaced manufacturing as a determinant of the business cycle. “The service sector is much less volatile. That could mean that we are getting a calmer economy with fewer deep valleys and fewer high peaks. Some of that is true, but a new factor has been added, and that is financial shocks. Nowadays, many people have equity, by owning their own stocks, savings or homes, or accruing pensions. This makes us all much more vulnerable to events in the financial markets. And the financial sector is very big in the Netherlands. It could therefore become more important to the business cycle than industry. To get a picture of the business cycle, the question used to be: ‘How is the Ruhr?’ Now it should actually read: ‘How are things on Wall Street?’ Because that is where the real danger is right now. The good news is that things are going great there right now, which makes the news from Germany less of a concern. The bad news, however, is that things can go wrong on the stock market overnight, without warning.”