FRANKFURT: Looming negotiations of the U.K.’s exit from the European Union promise to be a heated political debate influenced by commercial interests. Weightiest among those is Britain’s trading relations with Europe’s largest economy, Germany.
Germany has much to lose because it exports roughly twice as much to Britain as it imports from the U.K. That ratio helps explain why German Chancellor Angela Merkel quickly responded to Britons’ vote by advocating a measured response amid calls from other EU members for a hasty severance.
Many EU officials have said Britain should pay a steep price for exiting the bloc, to deter followers. But Ms. Merkel told the German parliament Tuesday that during eventual EU negotiations with Britain on its exit, Berlin would “focus its attention on the interests of German citizens and German companies.”
For Germany, the bloc’s second-largest economy remains vital even outside the EU.
“The U.K. economy is very important for Germany, especially for its exporters,” said Michael Heise, chief economist at Allianz SE. “It makes sense from a business perspective not to put undue pressure on Brexit negotiations.”
Germany is Britain’s second-largest export market after the U.S. and its biggest source of imports, ahead of China, according to the U.K. Office for National Statistics.
German exports to Britain have soared even as sales to once-booming developing markets including China and Russia slid over recent years.
The U.K. is Germany’s third-largest export market after the U.S. and France, according to Germany’s Destatis statistics office. It is the number-two target for German foreign direct investment after the U.S., according to UniCredit.
German goods exports to Britain leapt almost 13% last year, to just over €89 billion ($98.35 billion) and rose another 1.1% in the first four months of this year from the year-earlier period.
That surge swelled Germany’s trade surplus with the U.K. to a record high last year of almost €51 billion, according to Destatis. The German surplus has roughly quadrupled since 2000.
Britain is German car makers’ top export market, according to Germany’s VDA automotive industry association. Other major German exports include machines, chemical products, optical equipment and food.
Companies and their associations quickly warned uncertainty about Britain’s future and a weaker pound, which makes German goods more expensive in the U.K., will hurt sales soon.
“It won’t take long until we will see a noticeable decline in our machinery exports to the U.K.,” said Thilo Brodtmann, the managing director of Germany’s VDMA engineering federation, which represents more than 3,100 midsize companies. Germany’s VCI chemical industry association warned of a drop in exports and direct investment.
Brexit’s sweeping impact will knock at least half a percentage point off Germany’s economic growth rate next year, UniCredit’s chief German economist, Andreas Rees, predicted. He now expects gross domestic product growth of less than 1% in 2017 after roughly 1.75% growth this year. UniCredit also slashed its U.K. growth forecast for next year to zero from around 2%.
Ringspann GmbH, a family-owned machinery maker near Frankfurt that exports to Britain through a 12-person sales team there, already has seen U.K. order income fall 40% this year amid “considerable uncertainty about the U.K. economy,” head of sales Nico Hanke said. “International companies will think twice about investing” in Britain, he said.
Driving that uncertainty is the looming renegotiation of Britain’s ties with the EU’s remaining 27 countries. The process, which is unlikely to begin before the fall, could take at least two years.
Until ties are renegotiated, businesses won’t know to what extent Britain will remain part of the EU’s tariff-free single market. Many fear commerce will be impeded.
German machine tool maker Trumpf, which has production sites in Britain, fears the advanced lasers it produces in the U.K. eventually could require authorizations to cross the Channel, spokesman Andreas Moeller said. Trumpf also worries about a weaker pound and new tariffs.
“U.K. corporate investment was already restrained ahead of the referendum, and it will get even weaker now,” Mr. Moeller said.
Ringspann’s Mr. Hanke said, “Of course, shipments will be more expensive. There will be more paperwork, and it will take longer.”