Corporate Confidence

Shrugging off the Worries

  • Why it matters

    Why it matters

    After years of faltering global growth, the prospects for German companies in 2017 are looking good.

  • Facts

    Facts

    • Twenty-eight German industry associations foreacst an increase in production in 2017.
    • Germany’s 30 DAX-quoted companies are this year expected to generate net profits of €74 billion, up from €49.6 billion last year.
    • The global economy is expected to grow at a five-year high of 3.5 percent in 2017, up from 3.0 percent in 2016.
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    Audio

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Construction and a host of other German business sectors are optimistic about 2017, despite the political environment. Source: Daniel Bockwoldt, DPA

Germans, and German companies, are not exactly known for their unbridled optimism. In fact, it’s practically become a tradition in the country to never mention the world “boom.”

So it is all the more refreshing to learn that a survey by the German Economy Institute IW, a think-tank with ties to employers, found that most executives are optimistic about their prospects for 2017.

The survey looked at the views of 48 industry sectors across Europe’s largest economy. It found that 28 industry associations expect an increase in production – though only three of these expect the increase to be strong – while just 8 associations expect production to decrease next year.

“Worldwide there is a renewed tendency towards protectionism and nationalism.”

Michael Hüther, IW Director

Among those expecting production to increase is Germany’s chemical and pharmaceutical industries association, which, following a 3-percent fall in sales in 2016, is expecting turnover to increase a modest 1 percent next year.

Much of the optimism comes back to Germany itself. Outside of their domestic markets, many firms are expecting greater risks in 2017 than opportunities. That poses a major challenge for a country that relies so heavily on exports.

“Worldwide there is a renewed tendency towards protectionism and nationalism,” Michael Hüther, head of the IW institute, said of the nervousness of many companies when it come to international prospects. “Of course these developments hinder the economic prospects of an export-oriented country” like Germany, Mr. Hüther added.

The most obvious signs of that move towards greater protectionism and nationalism are the election of Donald Trump to be the next U.S. president and Britain’s referendum decision to leave the European Union.

Although many companies are reluctant to expres concerns as openly as Mr. Hüther, Joe Kaeser, the chief executive of the Munich-based engineering conglomerate Siemens, has plenty of reasons to be worried about the world’s current political situation, the looming possible trade restrictions and growing populism.

Although Siemens’ net profits of €5.5 billion ($5.8 billion) for 2016 were higher than expected at the beginning of the year, the blue-chip company based in Munich generates 85 percent of its sales from outside Germany. That’s cause for worry in the current climate.

For 2017, Mr. Kaeser is targeting an operating revenue margin for its industrial businesses of between 10.5 and 11.5 percent, compared to 10.8 percent in 2016. Siemens’ profits for 2017 are expected to grow with a target of between €6.80 and €7.20 per share, up from €6.74 this year.

“Our forecasts leave little scope for mistakes,” Mr. Kaeser has admitted, even if he believes confidence is not out of place as far as 2017 is concerned.

Like most German companies, Siemens is expected to benefit from a broader recovery of the global economy. Most economists are forecasting that the world economy will grow at a five-year high of 3.5 percent in 2017, up from 3 percent in 2016.

The main reasons for the expected increased growth are the fact that China’s economy is beginning to stabilize, while Europe’s economy is showing signs of finally recovering – despite Brexit and the Italian banking crisis – and the U.S. economy is also picking up speed. All these developments are welcome news for export-oriented German companies.

2016 has already been a good year: Germany’s 30 blue-chip companies listed on the DAX stock exchange are expected to generate net profits of €74 billion, up from €49.6 billion last year. Thanks to the global upswing, that positive trend could well continue into 2017.

Another important indicator for 2017 are the sentiments of company purchasing managers, who report that conditions have improved in all important regions in terms of demand, production and employment.

In Europe, which for years has been a particular weak spot of the global economy, manufacturing conditions in the euro zone improved at their best rate in more than five years in December, according to the research company Markit, which survey 4,000 companies each month. “The PMI surveys point to the economy gaining strength,” Markit chief economist Chris Williamson said in December’s release, adding that inflation is also on the upswing.

In fact, Germany’s industry has for several months already been benefiting from an upturn in the global economy, which kicked in towards the end of 2016. In October, according to figures from the German federal economics ministry, orders received by German firms rose 4.9 percent compared with the previous month: the strongest gain in more than 2 years.

The rising demand came from within Germany as well as from countries outside the 19-nation euro area, where demand rose by as much as 6 percent.

“It appears to be full steam ahead now for industry,” said economists at Commerzbank in a recent research note, while Britain’s largest bank Barclays spoke of a “turbo start.”

Construction companies, and those in related sectors, are now particularly confident, as they stand to benefit from persistently low interest rates that are fueling an ongoing trend of investing in real estate. This has fueled demand for the building of new homes as well as buying existing homes for renovation.

This economic activity has in turn been a boon for the construction materials and DIY sector. In the first nine months of 2016, for example, building supplies firm Hornbach Holding saw its sales rise 5.9 percent to €3.2 billion while pre-tax profits rose 5.7 percent to €182 million.

“Our online activities have increased our share of this success,” said the company’s chief executive, Albrecht Hornbach.

Like Hornbach, many firms are now investing heavily in infrastructure as part of the so-called “Industry 4.0” trend towards greater automation and data exchange in manufacturing technologies.

Eighteen out of a total of 48 industry associations surveyed by IW signaled their intention to invest more in the coming year than in 2016. Even sectors that expect weaker business in 2017, such as banks and the printing industry, plan to increase investment in digital products.

“Digitalization is becoming more and more important in many industries and this drives companies to invest,” says Mr. Hüther.

The mounting evidence of rising investment is a good omen for 2017, since higher investment is still considered the most important prerequisite for an economy like Germany’s to prosper in the future.

 

Ulf Sommer is a senior company correspondent for Handelsblatt and is based in Düsseldorf. To contact the author: sommer@handelsblatt.com

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