Losing momentum

Weakening Global Economy Hits Home

A global slowdown is dragging down Germany.
  • Why it matters

    Why it matters

    The global economy is slowing down, with emerging markets and China all facing financial slumps and the diving price of oil all contributing to a slowdown and it’s dragging on results for Germany, too.

  • Facts


    • DAX companies earned almost 25 percent less in 2015 than expected.
    • China accounts for 6 percent of Germany’s export business.
    • Fewer than a third of German business managers expect to make profits in 2016.
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German companies are used to presenting their annual results with fanfare. But this results seasons, as the global economy heads for the rocks, directors are having to manage the expectations of their investors, and their staff.

Heinrich Hiesinger, chief executive of the steel giant ThyssenKrupp, warned of “massive overcapacity” in the steel market. Kurt Bock, chairman of the BASF chemicals group, said, “its key markets are not growing as fast as expected.” Wolfgang Büchele, head of the industrial gases company Linde, complained that customers were afraid “to sign new contracts.”

These three companies are part of a wider trend. As companies on Germany’s trademark DAX index present their annual results, it is clear that economic problems in China and the global economy are hitting home. Carmaker VW and Deutsche Post have warned that lower yields are to come. Auto parts maker Continental, typically guaranteed of profits, worked to lower expectations.

Analysts have lowered their forecasts for most companies, citing slower global growth. Eighty of the 306 companies listed in the Prime Standard segment of the Frankfurt Stock Exchange reduced their profit or sales, according to auditing firm EY. The last time the situation was this bad was in 2009, when the German economy shrank by 5 percent during the financial crisis. The 30 companies that make up the DAX index were expecting sales of €80 billion ($86 billion), but will make just €63 billion in 2015, 5 percent less than the year before.

“The return to national issues, following the long phase of globalization, is disturbing”

Karsten Junius, chief economist, Sarasin

Some three-quarters of major German corporations are doing business in China and they are going to need “strong nerves” in 2016, according to Wolfgang Schäfer, finance director of Continental. In Russia, Brazil and other emerging economies, the outlook is also murky due to declining commodity prices. The sharp drop in oil prices is even troubling for the U.S., where industry has prospered in the last several years due to the shale gas boom. Companies with strong ties to the U.S. like Siemens or metals trader Klöckner are suffering.

Particularly alarming from the perspective of German companies is the new trend for re-nationalization. In France, Poland and Hungary, nationalist, globalization-skeptic political parties are getting stronger. In the United States, populists like Donald Trump, who are strict opponents of the planned trans-Atlantic free trade agreement, appear to be gaining support.

“Globalization is slowing down,” warned DZ-Bank’s chief economist, Stefan Bielmeier. According to Handelsblatt calculations, the 100 largest listed companies in Germany generated two-thirds of their sales abroad. German bosses might be smart to be scared.

The Internet accelerated trade and the free movement of goods made products available everywhere faster. This benefited those companies that arrived early in the booming markets of tomorrow. Above all it benefited German companies. But this globalization trend now seems to be slowing.

In many countries the ongoing debt crisis and the austerity measures taken in response to the crisis have strengthened political parties that focus on having robust national identities. The wave of refugees since last year also encouraged this impulse to retreat from international markets. In France it’s the National Front; in Hungary and Poland it’s right-wing parties; in the U.K. it’s the threat of withdrawal from the E.U. All these movements go hand-in-hand with less cross-border liberality, including free trade.


German Businesses-trade dax baltic dry index 01


“The return to national issues, following the long phase of globalization, is disturbing,” said Karsten Junius chief economist at Swiss bank Sarasin.

Sociopolitical upheavals threaten the movement of goods by adding waiting times for trucks at suddenly re-closed national borders. This leads to longer travel times and higher transportation costs. “If border controls in Europe are the norm again, then growth will be weakened in the medium-term,” warned DZ-Bank chief economist Mr. Bielmeier.

In a global survey by the auditing firm PwC of 1,500 managers in 83 countries, only 28 percent of surveyed German executives said they expected their company would achieve growth this year. Instead of an “economic globalization” more than half of the managers interviewed expected that the markets would be increasingly national and isolated from other economies.

There are still bright spots on the DAX, however. Strong growth in rental software has provided a nearly perfect balance sheet for Europe’s largest software company SAP. The company showed excellent results, was optimistic about the new year and is aiming for its seventh consecutive record year in 2016. A few days ago, SAP replaced Bayer as the most valuable German company, with a market capitalization of €87 billion.

But SAP remains an exception. The weakening economy in key foreign markets such as China, Russia and South America means that many German companies are performing more modestly.

Large industrial companies in Germany on the MDAX and SDAX with a strong overseas presence have all been hit. These include companies such as the automotive supplier Leoni, the clothing chain Hugo Boss, the chemical specialist Brenntag and the steel producer Salzgitter. The auto industry is suffering too. Half of all carmakers or suppliers reduced their profit forecasts.

Consulting firm EY predicts there will be no break from the bad news. “Fewer and fewer companies are actually meeting their forecasts,” said analyst Martin Steinbach. There’s also a link between faltering emerging markets and low oil prices. In many emerging markets, the state budget largely depends on oil sales. But oil now costs only half as much as it did last spring. Demand for German industrial products is shrinking in countries such as Saudi Arabia, Russia, Canada, Brazil, Mexico and Venezuela. Siemens had hoped to benefit from the shale gas boom in the U.S. but fell into a downward spiral after the acquisition of the supplier Dresser-Rand. BASF’s pre-tax profits sank by 8 percent in 2015 thanks to poor results in the oil and gas sector, but its chemicals division also weighed on the balance sheet.


The shipping news is not good these days. Source: DPA


There’s no improvement in sight as oil prices continued to fall in recent weeks – and along with it the demand of many companies and countries. So each week, analysts are lowering their estimates for German companies. And these companies cannot reply on favorable exchange rates any more either. The weak euro, depreciated by more than 10 percent against the dollar in 2015, boosted the pre tax earnings of the 30 DAX companies of around €12 billion euros – thus glossing over some weaknesses. This effect is unlikely to be repeated in 2016, since the euro is strengthening.

The days of double-digit earnings growth in China have given way to “China’s New Normal,” as Siemens chief executive Joe Kaeser aptly described the phenomenon.

Martin Wansleben, chief executive of the German Chambers of Industry and Commerce (DIHK), alo warned that “China has become the problem child of the global economy.

He said German exporters of machinery, electrotechnology and vehicles felt the effects of slowing investment activity in many foreign markets.

Companies will consider themselves lucky if they can set foot in China at all in 2016. Not only is the country’s economy growing weaker, its leadership is also increasingly promoting domestic producers and relying on industrial upstream products from their own country. German exports to China, which account for 6 percent of total exports, have been declining since last spring.

The misery is even reflected in the much-watched Baltic Dry Index. The index is of the costs of shipment of essential goods and upstream products and fell to its lowest level in almost 30 years – below the level when globalization had just begun. Decreasing demand means companies are sending fewer and fewer goods to foreign countries.

Nobody is suffering more than world export leader Germany. The German export model – once hailed as a great success story – is faltering.


Ulf Sommer reports for Handelsblatt on companies and financial markets. To contact the author:sommer@handelsblatt.com

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