Germany Inc. Zones In on Global Risks Overshadowing Economy

  • Companies cautious over political uncertainty damping orders
  • Country has become target of criticism for U.S. administration

Germany’s economy is running at full speed, yet some of its biggest companies are far from getting carried away about the future.

Thyssenkrupp AG last week became the latest of the country’s top firms to intertwine words of caution in what’s shaping up to be a strong earnings season, joining peers like Siemens AG in warning against global risks -- concerns that also featured strongly in the European Commission’s updated forecasts. Companies’ messages seem to stand at odds with signs that the economy is barreling ahead after expanding in 2016 at the fastest pace in five years.

Industry leaders aren’t alone in their qualms about the outlook. The European Central Bank has grown increasingly nervous about the impact of President Donald Trump’s policies on the world economy: Executive Board member Peter Praet cited “the signals we get from the U.S.” as his biggest worry and Bundesbank President Jens Weidmann expressed concern about accusations that Germany is exploiting trading partners with an undervalued currency.

“The economy is in pretty good waters, both at home and abroad, but there are clouds on the horizon,” said Andreas Scheuerle, an economist at Dekabank in Frankfurt. “We don’t know whether Trump will realize his warnings but the danger that he does is there.”

For now, momentum appears intact. Gross domestic product increased 0.5 percent in the fourth quarter, according to a Bloomberg survey before data on Tuesday. The European Commission raised its 2017 and 2018 growth forecasts for Germany by 0.1 point each to 1.6 percent and 1.8 percent, respectively.

“Supported by robust employment and consumption, the German economy is forecast to maintain its momentum over the forecast horizon, although the possible threat of trade barriers with key partners pose significant downward risks,” the Commission said. “The solid labor market, resilient exports, and booming construction are expected to provide a boost to growth and support equipment investment.”

Mixed Messages

According to the Ifo Institute’s closely watched business confidence index, companies’ assessment of current conditions improved in January, while a gauge of prospects had its steepest decline in 11 months. That could reflect nerves about political instability, with Germany just one of a number of countries holding national elections this year.

The same contrast between strong results and muted expectations can be read out of corporate Germany’s earnings statements. Siemens raised its full-year outlook for the third time in just over 12 months after posting better-than-predicted quarterly profits in January, while warning that orders are starting to weaken.

“We’re also seeing a highly volatile and cautious market reflecting current uncertainties in the political environment,” said Lisa Davis, managing board member responsible for energy. “This caution is damping investor confidence and resulting in projects being largely deferred.”

Steelmaker Thyssenkrupp also reported higher earnings, and while noting that Trump’s announced infrastructure projects may pose an opportunity, it also said import tariffs on goods from Mexico could jeopardize supply chains.

BMW AG, which hasn’t yet published results, expressed similar concerns. Chief Executive Officer Harald Krueger has stressed the importance of the U.S. to his firm in terms of sales and production after Trump singled out the carmaker for building a $1 billion factory in Mexico.

‘Chaotic’ Environment

Political risks within Europe also pose a threat to corporates, and not just in Germany. L’Oreal SA CEO Jean-Paul Agon said on Friday that the French cosmetics company is finding long-term planning more difficult amid a “chaotic” political environment. His country is engulfed in one of its most uncertain presidential elections, and Britain is preparing for a hard break from the EU.

The Bundesbank has tried to assuage concerns by pointing to economic fundamentals.

“Germany’s economy is on a sound upward trajectory,” Weidmann said in a Feb. 8 speech. “It is chiefly being driven by brisk domestic consumer demand and “a more vibrant global economy should also boost export growth again, despite the fact that the international environment is fraught with political uncertainty.”

Even though the biggest surge in factory orders since 2014 suggests Germany’s strong run at the end of last year might not soon run out of steam, the country’s BGA association of exporters has warned of potentially “catastrophic” consequences of U.S. trade policies. It currently forecasts shipments abroad to expand 2.5 percent in 2017, after 1.2 percent last year.

“What we need is free trade worldwide,” the group’s president, Anton Boerner, said in an interview with Bloomberg Television. “If a big player like the U.S. is focusing on raising customs, especially versus East Asia or China, then the world economy will drop into a deep recession and all of the players worldwide will lose the game -- there will be no winner.”

— With assistance by Oliver Sachgau, and Tino Andresen

    Before it's here, it's on the Bloomberg Terminal.