Germany: is the recession coming??

Germany: is the recession coming?

Symbol image: Kim from Sherwood Park, Canada. License: CC BY 2.0

Massive drop in orders in mechanical engineering, short-time work at automotive suppliers

This week, the German Engineering Federation (VDMA) reported a nine percent drop in orders for the first half of 2019. The industry, which employs over one million people and has a production value of 225 billion euros, therefore expects the two percent increase in production in 2018 to turn into a two percent drop this year.

The fact that domestic orders decreased at the same rate as those from abroad (cf. How much does the U.S.-China trade conflict affect third countries?), shows that the economic difficulties of the automotive industry as a major customer are now also having an impact on this sector.

Expectation of loss of sales and returns

The machine manufacturer Aumann from Beelen in North Rhine-Westphalia, which in addition to automated production lines also offers machines for the manufacture of electric motors, is therefore expecting a drop in sales from 290 to 260 or even 240 million euros. Earnings before interest and taxes were allowed to fall from 29.3 to only 16 to 22 million euros.

Bosch CEO Volkmar Denner also had to explain to the Suddeutsche Zeitung yesterday that, due to an "declining demand" both loss of revenue and return on investment expected. And "different from the past, when it was almost always upwards", he now goes "expects automotive production to stagnate in the coming years".

Investments abroad

At Continental, another major automotive supplier, CFO Wolfgang Schafer also admits in Manager magazine to "Less optimistic than before", after his company also had to revise sales and profit expectations downward. Continental, however, is also investing – in Lithuania, where it plans to start up a new plant this year. Similar investments by suppliers exist in the Czech Republic, Hungary and other countries with a more car-friendly pre-political climate than Germany’s.

The bad news from the manufacturing sector in Germany is now also threatening the retail sector, which is complaining about a drop in consumer confidence for the third time in succession. The Ifo business climate index has now dropped four times in a row, according to VP Bank chief economist Thomas Gitzel "the German economy to a recession".

For the economist Heiner Flassbeck, such a recession is even already here and is only being triggered by statistics from the state leadership "veiled". The German Institute for Economic Research (DIW) is somewhat more cautious in its forecast for the third quarter of 2019 "Restrictive growth" reckons.

Short-time work, unemployment, tax sack

If the development continues like this, we can also expect a worsening of the unemployment statistics, which regularly follows an economic decline with some delay. The short-time work that precedes it has already doubled compared to 2018. According to NDR, it also affects automotive suppliers particularly strongly. According to Stephan Soldanski, head of the Osnabruck branch of the IG Metall union, who he cites "Many people do not know what will happen after the summer break".

At the latest, the economic decline was allowed to reach the budgets of the federal government, the states and the municipalities through lower tax revenues. The preparations for new consumption taxes, which will be applied not to earnings or profits but to consumption, can also be read as a reaction to such an expectation.