German Firms Strike Cautious Tone in Clash With Solid Growth

  • Timid company outlooks contrast with Bundesbank’s optimism
  • Second quarter saw earnings, economic expansion beat estimates

The German economy is fulfilling its role as Europe’s powerhouse. Yet some of its biggest companies see obstacles ahead.

Siemens AG and Evonik Industries AG are among businesses delivering a cautious message on future demand amid increased global risks. That’s even after second-quarter earnings at the nation’s blue-chip firms beat estimates by more than 10 percent and the economy expanded twice as much as forecast.

While Bundesbank President Jens Weidmann has said repeatedly that Germany’s underlying growth remains strong, executives’ confidence has been reined in by Brexit, a failed coup in Turkey and terror attacks in Germany and France. A survey of purchasing managers showed that the euro-area economy maintained its momentum in August, even as Germany’s services sector posted its weakest performance in 15 months.

“Uncertainty in Turkey and the U.K. could cause a slowdown in investments in the second half of the year,” said Olaf Wortmann, an economist at Germany’s VDMA engineering association. “Germany has a traditional focus on investment goods, and if that sees a pause in growth, that could have an effect on overall GDP.”

Political Risks

The U.K., which shocked investors in June by voting to quit the European Union, and France are two of Germany’s biggest trading partners. Turkey, as well as being a sizable export destination, has close ties with Germany and the EU, which could lead to political stability there to reverberate through the economy. Almost two thirds of German company managers fear Brexit could impact their business, according to an August survey by Computer Sciences Corporation.

German spending on equipment and construction was already acting as a drag on gross domestic product in the second quarter, when net trade helped the economy grow 0.4 percent. The Federal Statistics Office will publish a data breakdown on Wednesday. The Ifo research institute is set to update its business-climate index on Thursday.

Siemens may be one of the best examples of the disconnect between today’s robust performance and the fragility that may lie ahead. Europe’s biggest engineering company raised its earnings outlook for the second time this year in early August after posting higher-than-expected quarterly profit, only for Chief Executive Officer Joe Kaeser to warn of restraint and a weakening investment climate that will be addressed in the company’s November projections.

Lufthansa AG reversed its full-year profit forecast in late July, blaming fewer reservations on terror attacks as well as political and economic uncertainty. HeidelbergCement AG already saw one major project postponed after the U.K. referendum result, and even Evonik Industries, a company that said on Aug. 5 it isn’t directly affected by either Brexit or the attempted Turkish coup, was wary about the economic outlook.

Official Optimism

The Bundesbank, on the other hand, sounds confident. In its latest monthly report, it pointed to improving sentiment in manufacturing and argued that the consequences of the British vote will be limited. For the third quarter, Weidmann’s institution predicts a solid increase in exports, a pickup in investment and a return of private spending as the main driver of economic growth -- in short, a continued, broad-based recovery.

Some economists share that optimism.

“German companies exposed to domestic demand should see tailwinds coming from consumption in the next few months,” said Andreas Rees, chief economist at UniCredit Bank AG. “The robust upward trend in the job market and low inflation means people will continue spending.” For exporters, “it doesn’t look too bad” either, despite “a few uncertainty factors,” he said.

IHS Markit said Tuesday that the German economy is growing at a slightly faster pace in the third quarter than in the first half of the year -- despite a slowdown in services activity in August.

Skeptical Strategists

Strategists aren’t buying it. While the benchmark DAX Index recently entered a bull run, completing a 22 percent advance from its February low, they are calling for an annual slide of 7 percent, according to data compiled by Bloomberg. That would imply the first calendar-year decline since 2011.

Policy makers’ assessment “may partly be an expression of confidence in the effect of their actions,” said Aline Schuiling, senior economist at ABN Amro NV in Amsterdam. “But the picture doesn’t look great. We still have a lot of political uncertainty so it’s hard to be overly optimistic.”

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