U.S. Markets open in 6 hrs 30 mins

German Industry Recession Worsens as Companies Cut Profit Goals

Fergal O'Brien
German Industry Recession Worsens as Companies Cut Profit Goals

(Bloomberg) -- Germany’s industrial crisis is worsening, the economy is at risk of recession and a raft of mounting troubles mean the chance of a near-term turnaround are fading.

Trade tensions, weaker demand abroad and the travails of the car industry have built up over the past year to take a toll on the engine of Europe’s economy. They’ve dragged manufacturing into its deepest slump in seven years, and some of the nation’s biggest corporate names from BASF SE to Daimler AG and Continental AG have had to come to terms with a new reality for business.

As one of the world’s biggest exporters, Germany is paying a high price for the the slowdown in global trade. The economy is forecast to grow the least in six years in 2019, the Bundesbank sees no sign of an export recovery and some are even saying there’s a risk of recession.

All that is being reflected across the corporate landscape, where companies are having to rein in their predictions amid pressure on sales. Engineering firm Duerr AG said Monday it’s facing a “more challenging macroeconomic environment. Chemicals giant BASF earlier this month said trade conflicts have put a dent in global growth, as well as its business.

Deutsche Bank Woes

Beyond manufacturing, Germany’s image has also been dented by the troubles at Deutsche Bank AG, which is cutting thousands of jobs, and warned Wednesday that its trading slump deepened.

Within industry, much of the weakness is centered on cars, where flagging demand is hitting both auto makers and their suppliers while they’re in the midst of an expensive transformation to the world of electric vehicles. Steel and metal firm Kloeckner & Co. SE on Monday cited the automotive industry, as well as a “further weakening outlook for the general economic development,” when it cut its profit forecast.

Also hanging over the industry is President Donald Trump’s threat to slap tariffs on European Union cars. The EU on Tuesday ramped up to 35 billion euros ($39 billion) the amount of U.S. goods it would hit with retaliatory levies if Trump follows through. While the worst case could still be avoided, the threat is taking a toll on executive sentiment.

“The uncertainty about trade is a dominant driving force, that’s especially relevant for a country like Germany. But there are also other pockets of uncertainty specific to Europe, like negotiations on Brexit,” said Andrew Bosomworth at Pimco in Munich. “And then we’ve got a pretty mature cycle underneath it.”

The question for Germany is how bad the downturn, once expected to be temporary, will become. That has repercussions for the euro area, and European Central Bank policy makers have already started laying the groundwork to add further stimulus. They’re expected to hint at interest-rate cuts at their meeting in Frankfurt on Thursday.

Concern about the economy, as well as anticipation of ECB easing, has pushed German 10-year bond yields down to -0.37%, and the Bloomberg Euro Index is at a two-year low.

While the services sector continues to grow, the constant disappointments for the economy and corporate confidence could take a deeper toll on hiring. Manufacturing employment in the euro region fell in July and the jobs growth in services slowed.

There were also troubling signs for French manufacturing on Wednesday, where the factory Purchasing Managers’ Index declined in July and now points to stagnation. A euro-area factory gauge is at the weakest in six years.

--With assistance from Carolynn Look, Catherine Bosley, Paul Dobson, Zoe Schneeweiss and Jana Randow.

To contact the reporter on this story: Fergal O'Brien in Zurich at fobrien@bloomberg.net

To contact the editors responsible for this story: Craig Stirling at cstirling1@bloomberg.net, Chad Thomas, Andrew Blackman

For more articles like this, please visit us at bloomberg.com

©2019 Bloomberg L.P.